The Triple Exponential Average (TRIX) is an effective indicator used to identify divergences as well as confirm price action.
- Confirmation: TRIX is rising and the price of the stock, currency, or future is rising. Likewise, when the TRIX is falling and the market price is falling.
- Divergence: TRIX is rising or neutral and the market price is falling; or TRIX is falling or neutral and the market price is rising.
Confirmations and divergences are shown below in the chart of the E-mini S&P 500 Futures contract:
Low #1 to Low #2
The E-mini S&P 500 Futures contract made a higher low and was likewise confirmed by the TRIX indicator making a higher low as well.
High #1 to High #2
The e-mini future managed to make higher highs; however, the Triple Exponential Average made a quite noticeable lower high and low. This bearish divergence warned that prices might change course and that traders would do well to reduce their long positions.
The TRIX making lower highs combined with the e-mini's double top formation and subsequent neckline break would also be a powerful indication that the recent price rise was likely over.
Low #3 to Low #4
During the S&P 500 e-mini's downtrend, it managed to make a significant lower low. In contrast, the Triple Exponential Average made equal lows, generally a sign that a price bottom was forming. Astute traders would see this TRIX divergence and would begin to buy to cover their short positions.
The Triple Exponential Average (TRIX) screens out short-term volatility and hence, is a valuable tool for medium and longer-term periods for uncovering divergences in price as well as giving easy to understand buy and sell signals.
