Crypto Trading Using Trix Indicator - Crypto Academy /S6W3-Homework Post for kouba01
Hello everybody.
Welcome to this post. Hope that all of you will be happy and fine and enjoying your good health with the grace and blessings of Almighty Allah. Today, I am here to present the homework post for dear professor @kouba01 in Week 3 of Season 6 of the Steemit Crypto Academy. The lecture was nicely explained by the professor and I will try my best to explore the task as explanatory as possible. So, let's start the task without any wastage of time.
There are some questions that are asked by the professor as the assignment for this week and I will try to explain them one by one in the given order.
(01)
Discuss in your own words Trix as a trading indicator and how it works?
As we all know that the market of cryptocurrencies is so volatile that it is very difficult for traders to predict the next move of the market. However, there are some technical analysis tools like the technical indicators that can be used to assume or forecast the upcoming movements of the price. Technical Analysis deals with the use of these tools on the price charts of the crypto asset pairs.
TRIX indicator is also one of the most important technical indicators that can be used in technical analysis and help traders to make profitable trading decisions. TRIX actually stands for Triple Exponential Average is a momentum indicator, as well as, an oscillator that is used to determine the Oversold and Overbought regions in the markets.
TRIX indicator was actually designed by a trading expert named Jack Hanson in the 1980s. The TRIX indicator had been used by many traders to make profitable trading decisions in the market. The Triple Exponential Average filters out or ignores all the unimportant or slight movements of the price action. Thus, the trading signals that are given by the TRIX indicator are of unique significance e for the traders.
TRIX indicator resembles the MACD (Moving Average Convergence Divergence) indicator and RVI (Relative Vigour Index) indicator to a great extent. The main difference between the MACD indicator and the TRIX indicator is that the signals that are given by the TRIX indicator are smoother than the MACD signals. Let's have a look at a chart on which the TRIX indicator is applied.
In the above picture, we can observe that the TRIX indicator is applied on the ADA/USDT chart of 45 minutes timeframe.
- Working of TRIX indicator:
As we have discussed that the TRIX indicator is very much related to the Exponential Moving Averages indicators. The TRIX indicator can be used as an oscillator and also be used as a momentum indicator and could be very helpful for the traders in the technical analysis of the price charts. First of all the Simple Moving Average was used as the trend-based indicator that was used to determine the trends of the market.
But there were some drawbacks of the simple moving averages that were improved by the development of the Exponential Moving Averages (EMA). The EMA reacts very faster to the price action as compared to the Simple Moving Averages. For this fact, the EMA was beneficial for the traders but there was also a drawback of these moving averages as they also react to the slight price movements or market noises.
To overcome this problem of the EMA indicators, an indicator naming TRIX (Triple Exponential Moving Averages) was developed. TRIX indicator filters out the non-beneficial or irrespective noises of the market. The calculation of the Exponential Moving Averages was modified to overcome the problem of the EMA. So, at last, we got a smoother and clear indicator (TRIX) that ignores the market noises and provides good trend identifications.
The TRIX indicator looks like the MACD to a great extent. TRIX consists of a single line that oscillates above and below the zero line of the indicator. When the TRIX line cuts off the zero line to the upside, it is a signal of the bullish trend, and when the TRIX line cuts off the zero line to the downside, it is a signal of the bullish trend. TRIX can also be used as an oscillator that indicates the Overbought region when the TRIX line is in a highly positive region and the Oversold region is indicated when the TRIX line is in the highly negative region.
(02)
Show how one can calculate the value of this indicator by giving a graphically justified example? how to configure it and is it advisable to change its default setting? (Screenshot required)
As we all know that technical analysis deals with the prediction of upcoming prices by studying the historical price data of the markets. So, the technical indicators work on the calculations that are obtained from different points of the previous prices. These points include Open, Close, Low, and High. So, now we will look that how can we calculate the TRIX indicator. As we have discussed earlier that the TRIX indicator is actually composed of three exponential moving averages. So, we will look at the calculation of Exponential Moving Averages first.
EMA actually works on the basis of the closing points of the historical prices. The formula for the calculation of EMA is as follows.
EMA = (closing price × weight ) + (Last Day EMA) × (1- weight)
And, the formula for calculating the EMA1 is as follows.
EMA1 = EMA ( P, N, 1)
Here, P is the current price of the assets and N is the number of periods that we have selected. The default value of N is 14 but the traders can configure it according to their trading style. From the value of the EMA1, we can also calculate the value of the EMA2 which is also known as Double EMA.
EMA2 = EMA (EMA1, N, P)
As we have discussed that the TRIX indicator consists of three Exponential Moving Averages so we have to calculate the EMA3 now that is Triple Exponential Moving Average (TRX).
EMA3 = EMA ( EMA2, N, P)
OR,
TRIX =[ 3EMA(P) - 3EMA(P - 1)] / 3EMA(P- 1).
The above expression can be used in the calculation of the TRIX indicator. Now, have a look at a chart in which the calculation of the TRIX indicator is applied graphically.
Configuration of TRIX indicator
The most important setting of the TRIX indicator includes the setting of the "EMA Period" or length of the TRIX line. The wrong setting of the length of the TRIX line (EMA Period) can harm the traders by providing false signals. The default setting of the length of the TRIX line is 14-15 and the traders can change this setting according to their trading style. To modify the periods of the TRIX indicator, we have to follow these steps.
- First of all, click on the setting button of the TRIX indicator. Now, a menu will be popped-up and in the Inputs section, we can modify the periods. You can see in the below image that the length of the TRIX indicator was 18 and we can change it according to the trading strategy.
It is always advisable to modify the period setting of the TRIX indicator according to your trading strategy. For scalp trading, we can use the lower length and for long-term or swing trading, we can use the higher length of the TRIX indicator. The higher the length of the TRIX line, the more the noises will be filtered out and vice versa.
- We can also modify other settings of the TRIX indicator such as colors of the TRIX line and zero line, width of the TRIX line and zero line, etc. These settings can be done from the Style section of the setting menu.
- The visibility of the TRIX indicator can also be modified from the Visibility section of the setting menu.
(03)
Based on the use of the Trix indicator, how can one predict whether the trend will be bullish or bearish and determine the buy/sell points in the short term and show its limits in the medium and long term. (screenshot required)
As we all know the identification of the trends is very important for the traders before entering the market. Trend identification plays a vital role in the technical analysis and traders can make profitable trading decisions by understanding the trend of the market.
The trends of the markets are determined by the oscillation of the TRIX line above or below the zero line of the indicator. The trend reversals are also to be noticed by the breakouts of the TRIX line on the zero line of the indicator. These breakouts are also very helpful in determining the buy and sell areas in the market.
- Identification of Bullish Trend:
The bullish trend can be identified by the TRIX indicator by the breakout of the TRIX line above the zero line of the indicator. If the price makes a breakout and crosses the zero line and starts moving above, this can be considered as a trend reversal from bearish to bullish. The breakout point could be considered as a very good Buy point. An example can be seen in the below screenshot.
From the above screenshot, we can observe that when the TRIX line cut off the zero line of the indicator and entered the positive region, the Bullish trend started and the breakout point could be considered as a good buy position.
- Identification of Bearish Trend:
The Bearish trend can be identified by the TRIX indicator by the breakout of the TRIX line below the zero line of the indicator. If the price makes a breakout and crosses the zero line and starts moving below, this can be considered as a trend reversal from bullish to bearish. The breakout point could be considered as a very good Sell or Short entry point. An example can be seen in the below screenshot.
From the above screenshot, we can observe that when the TRIX line cut off the zero line of the indicator and entered the negative region, the Bearish trend started and the breakout point could be considered as a good sell position.
Limits in Short-Term Trading
As we all know that the TRIX indicator filters out all the minor noises from the market and shows a smooth price line. This indicator can be used properly for making good long-term trading decisions but while using it as a short-term trading tool, we can face some limits of this indicator. Let's have a look at the below screenshot in this regard.
From the above screenshot, we can observe different facts that are discussed in the following points.
In Phase 1, the TRIX line just crossed the zero line upward and this is a signal of the Bullish trend looking at the price action line, we can observe that the price started raising after a very long time (15 to 16 days). So, the buy signal was not appropriate for the short-term traders.
In Phase 2, we can observe that the price after completing the Bullish trend, started a downward movement. But by looking at the TRIX line, we observed that the line was not reacting in the favour of the sell signal as the TRIX line was moving above the zero line.
In Phase 3, we can observe that the TRIX line crossed the zero line and entered the negative region. But the price action does not start moving downside and was moving upward with the collection of bullish and bearish candles. So, this is also an inappropriate signal for short-term traders.
In Phase 4, we can see that the movement of the price was bearish but the flat line of the TRIX indicator shows that the bearish trend did not hold any momentum. So, this is a signal for the traders to not enter the market by opening the Short trades.
These points show that the TRIX indicator filters out all the minor noises of the market and provides a smoother line that can be used for making profitable trading decisions. The unnecessary movements of the market are ignored and thus the TRIX indicator can be used mostly by long-term traders.
(04)
By comparing the Trix indicator with the MACD indicator, show the usefulness of pairing it with the EMA indicator by highlighting the different signals of this combination. (screenshot required)
As we have discussed the use of the TRIX indicator in the above section we can make good entries in the market by looking at the breakouts of the TRIX line on the zero line of the indicator. We can also make valuable trades in the market when the TRIX line reached extreme levels. For this purpose, we have to use the 9 periods of EMA of the TRIX indicator. This indicator set will be used as the filter of the line signal that is also shown by the MACD indicator.
The mechanism of the crossing signal of the MACD indicator resembles the crossing signal of the TRIX indicator. In the case of MACD, when the MACD line crosses the Moving Average from bottom to top then this will be considered as a buy signal and when the MACD line crosses the Moving Average from top to bottom, this will be a Sell/Short signal.
Similarly, when the TRIX line crosses the Moving Average line from bottom to top, we will take a long position. And, when the TRIX line crosses the Moving Average line from top to bottom, we will take a short/sell position there. In this way, the crossing signal that is given by the TRIX and the MACD indicators are of great value for the traders to secure good profits.
Now, we will compare the crossing signals that are given by the TRIX=moving average and the MACD indicator of the default setting. We will use the 15-period of TRIX line with the 9-period moving average and compare it with the default MACD indicator (12, 26, 9). Both of these indicators consist of the same signal line that is 9 EMA. Now, we will compare these indicators that are actually both oscillators and oscillate about the zero lines. Let's have a look at the below screenshot.
From the above screenshot, we can observe that the TRIX indicator and the MACD indicator are applied on the chart. The lines of the MACD and the TRIX are represented by Blue color while the signal line (9-EMA) is represented by Orange color.
From the above graph, we can observe that the TRIX line is much smoother than the MACD line. The roughness of the MACD line is due to the minor fluctuations/noises but the TRIX indicator ignored/filtered out those false fluctuations so the line of the TRIX indicator is much smoother. This smooth line can help the traders for making valuable trading decisions in the market.
(05)
Interpret how the combination of zero line cutoff and divergences makes Trix operationally very strong.(screenshot required)
From the above whole discussion, we can realize the importance of the zero line of the TRIX indicator. The breakout or cut-off on the zero line of the TRIX indicator can be considered as a trend reversal or a good buy/sell signal as well. When the TRIX line cuts off the zero line upward, it is a signal of a trend reversal from bearish to bullish and when the TRIX line cuts off the zero line downward, it is a signal of the trend reversal from bullish to bearish.
The signals that are given by the breakout/cut-off of the zero line are very helpful and these signals can be strengthened when the other technical analysis tools like different technical indicators, patterns, are compared with these breakouts. Divergence is also one of the most important signals of potential trend reversals in the market and Divergence can also be taken along with the TRIX indicator to increase the strength of the TRIX signals. Let's have a look at the below screenshot for more details.
In the above image, we can observe that a Bearish Divergence was noted on the TRIX indicator as the TRIX line moved from top to bottom during a bullish movement in the price. This is the identification of the fact that the bullish trend of the price did not have any momentum. So, after 6 to 7 days, the effect of the Divergence is noted. We can notice that a potential Bearish trend was seen after the divergence as the TRIX line crossed the zero line from top to bottom. In this way, the Divergence signals, when combined with the breakout of zero line of TRIX indicator, also give profitable signals.
(06)
Is it necessary to pair another indicator for this indicator to work better as a filter and help eliminate false signals? Give an example (indicator) to support your answer. (screenshot required)
As we all know that the market of cryptocurrencies is so volatile that it is even after the use of technical analysis tools, the captured signals cannot be considered 100% true. Especially, when we are using a single technical analysis tool then we should be very careful about the fluctuations of the market. So, we just have to combine one or more indicators or technical analysis tools with this tool to confirm the true signals and filter out the fake signals from the market.
Nothing is 100% perfect in this world. So, the same is the case with the TRIX indicator. We should not completely rely on the TRIX indicator for making our trading decisions. We should have to combine other technical indicators with the TRIX indicator to increase the strength of our analysis, as well as, to filter out the fake signals from the market. There are many other technical indicators that can be used along with the TRIX indicator such as Parabolic SAR, Ichimoku Clouds, Aroon, etc. I am going to use the Aroon indicator along with the TRIX indicator. So, have a look at the below image.
In the above image, we can notice a few points that are given below.
In Phase 1, the Buy signal was given by the Aroon indicator at the start of the phase but the TRIX indicator gives that signal very late. The pattern was almost to return when the TRIX line crossed the zero line upward. This behavior of the TRIX indicator can harm the short-term or scalp traders.
In Phase 2, a similar case has happened. The Aroon indicator gave a sell signal at the beginning of the phase but the sell signal was given by the TRIX indicator when almost half of the trend has passed. So, the traders could be at a loss if they opened their Short trades according to the TRIX signal as the line of TRIX was still moving above the zero line at the beginning of the phase.
So, combining the TRIX indicator with the other technical analysis tools is always highly advisable as we have to try our best to find a profitable signal and filter out the fake signals from the market. The combination of the TRIX indicator with the Aroon indicator is very impressive in my view.
(07)
List the pros and cons of the Trix indicator
As we all know that the TRIX indicator is one of the best oscillators, as well as, momentum-based indicators in the cryptocurrency world. It can be used by many crypto traders to analyze the market of crypto assets properly. However, there are some advantages, as well as, disadvantages of the TRIX indicator. These are listed below.
Advantages of TRIX
The biggest advantage of the TRIX indicator is that it can be used as an oscillator, as well as, a trend identifier indicator.
The TRIX indicator can be used to ignore or filter out the minor market noises and thus we can avoid the fake fluctuations of the market.
It can also be used to determine the current trends of the market and the trend reversals that are taking place in the market.
The TRIX indicator, when combined with other technical analysis tools like the Divergence pattern, gives very strong potential trend reversals.
Traders can make good entry positions in the market by looking at the cut-offs of the TRIX line on the zero line of the indicator.
Disadvantages of TRIX
It is noticed that the TRIX indicator lags the price action a bit. The signals that are given by the TRIX indicator are sometimes too late that the pattern has reversed before the appearance of the signal on the Trix indicator. This behavior could harm the traders.
The TRIX indicator cannot be used alone for making good trading decisions in the market. It must be combined with some other technical analysis tools to work properly and effectively
Conclusions
The TRIX indicator is one of the most successful and profitable indicators for the crypto traders. It is actually Triple Exponential Moving Averages that are smoothened to filter out the minor market noises. It ignores the unnecessary fluctuations and provide clear signals that are of high profit for the crypto traders.
The TRIX indicator actually consists of a single line that oscillates above and below the zero line. When the TRIX line crosses the zero line upward, it is a buy signal and when the TRIX line cuts the zero line downward, it is a sell signal. Other technical analysis tools are used along with the TRIX indicator to make trading decisions of high profit.
So, that's all about the homework for this week. Hopefully, all of you will like this post. Special thanks to dear professor @kouba01 for such an amazing lecture.
Note: All the above screenshots are taken from TradingView.
Writer: @steemdoctor1 (Crypto Student)
