momentum and oscillators Part 2

1. Momentum and
Oscillators

2. Momentum
and
Oscillators
Section I – 39%
 Momentum
 Moving Average Convergence &
Divergence
Divergence Index
Oscillators
- RSI
- Stochastic
- Williams’s Oscillators (A/D oscillator)
- Relative Vigor index
Double-Smoothed Momentum
Velocity and Acceleration
Hybrid Momentum Techniques
Momentum Divergence

3. Concept of Momentum
• Momentum is the rate of acceleration of a security's price or volume. In technical
analysis, momentum is considered an oscillator and is used to help identify trend
lines.
• Momentum refers to the force or speed of movement; it is usually defined as a rate.
In the world of investments, momentum refers to the rate of change on price
movements for a particular asset – that is, the speed at which the price is changing.
• If a trader wants to use a momentum-based strategy, he takes a long position in a
stock or asset that has been trending up. If the stock is trending down, he takes a
short position.
• Instead of the traditional philosophy of trading – buy low, sell high – momentum
investing seeks to sell low and buy lower, or buy high and sell higher.
• Instead of identifying the continuation or reversal pattern, momentum investors focus
on the trend created by the most recent price break.

4. Concept of Momentum
• The study of momentum and oscillators is the analysis of price changes rather
than price levels.
• Momentum establishes the speed of price movement and the rate of ascent or
descent.
• First difference, the difference between today's price and the previous day.
• The change in momentum, also called rate of change, acceleration, or second
difference, is even more sensitive and anticipates change sooner.
• Indicators of change, such as momentum and oscillators, are used as leading
indicators of price direction. They can identify when the current trend is no
longer maintaining its same level of strength; that is, they show when an
upwards move is decelerating
• Momentum calculation shortens, this indicator becomes more sensitive to
small changes in price. It is often used in a countertrend, or mean reversion
strategy.

5. MACD (Moving Average Convergence/Divergence Oscillator)
• The Moving Average Convergence/Divergence oscillator (MACD) is one of the simplest
and most effective momentum indicators available
• The MACD turns two trend-following indicators, moving averages, into a momentum
oscillator by subtracting the longer moving average from the shorter moving average.
• MACD offers the best of both worlds: trend following and momentum. The MACD
fluctuates above and below the zero line as the moving averages converge, cross and
diverge.
• Traders can look for signal line crossovers, centerline crossovers and divergences to
generate signals. Because the MACD is unbounded, it is not particularly useful for
identifying overbought and oversold levels.

6. MACD - Calculations
• The MACD Line is the 12-day Exponential Moving Average (EMA) less the 26-day EMA.
• Closing prices are used for these moving averages.
• A 9-day EMA of the MACD Line is plotted with the indicator to act as a signal line and identify
turns.
• The MACD Histogram represents the difference between MACD and its 9-day EMA, the Signal
line.
• The histogram is positive when the MACD Line is above its Signal line and negative when the
MACD Line is below its Signal line.
• The values of 12, 26 and 9 are the typical setting used with the MACD, however other values
can be substituted depending on your trading style and goals.

7. MACD - Interpretation
• MACD is all about the convergence and
divergence of the two moving averages.
• The MACD Line oscillates above and
below the zero line, which is also known
as the centerline
• Positive MACD indicates that the 12-day
EMA is above the 26-day EMA. Positive
values increase as the shorter EMA
diverges further from the longer EMA.
This means upside momentum is
increasing.
• Negative MACD values indicate that the
12-day EMA is below the 26-day EMA.
Negative values increase as the shorter
EMA diverges further below the longer
EMA. This means downside momentum
is increasing.

8. MACD - Centerline Crossovers
• A bullish centerline crossover occurs
when the MACD Line moves above the
zero line to turn positive. This happens
when the 12-day EMA of the underlying
security moves above the 26-day EMA.
• A bearish centerline crossover occurs
when the MACD moves below the zero
line to turn negative. This happens
when the 12-day EMA moves below the
26-day EMA.
• It all depends on the strength of the
trend. The MACD will remain positive as
long as there is a sustained uptrend.
The MACD will remain negative when
there is a sustained downtrend.

9. MACD - Signal Line Crossovers
• The signal line is a 9-day EMA of the
MACD Line.
• A bullish crossover occurs when the
MACD turns up and crosses above
the signal line.
• A bearish crossover occurs when the
MACD turns down and crosses
below the signal line.
• Signal line crossovers at positive or
negative extremes should be viewed
with caution.
• MACD does not have upper and
lower limits, chartists can estimate
historical extremes with a simple
visual assessment.

10. MACD - Divergence

11. MACD - Conclusions
• The MACD indicator is special because it brings together momentum and trend in
one indicator.
• The standard setting for MACD is the difference between the 12 and 26-period EMAs.
• Sensitivity may try a shorter short-term moving average and a longer long-term
moving average.
• MACD(5,35,5) is more sensitive than MACD(12,26,9) and might be better suited for
weekly charts.
• The MACD is not particularly good for identifying overbought and oversold levels.
• The MACD can continue to over-extend beyond its historical extremes.
• This means MACD values are dependent on the price of the underlying security.
• It is not possible to compare MACD values for a group of securities with varying
prices.

12. Relative Strength Index (RSI)
• Developed by J. Welles Wilder, the Relative Strength Index (RSI) is a momentum
oscillator that measures the speed and change of price movements.
• RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI
is considered overbought when above 70 and oversold when below 30.
• Signals can also be generated by looking for divergences, failure swings, and
centerline crossovers. RSI can also be used to identify the general trend.
• The default look-back period for RSI is 14, but this can be lowered to increase
sensitivity or raised to decrease sensitivity. 10-day RSI is more likely to reach
overbought or oversold levels than 20-day RSI.
• Raising overbought to 80 or lowering oversold to 20 will reduce the number of
overbought/oversold readings. Short-term traders sometimes use 2-period RSI
to look for overbought readings above 80 and oversold readings below 20.

13. Relative Strength Index (RSI) - Calculations
• RSI has been broken down into its basic components: RS,
Average Gain and Average Loss.
• First calculations for average gain and average loss are
simple 14-period averages.
• First Average Gain = Sum of Gains over the past 14
periods / 14.
• First Average Loss = Sum of Losses over the past 14
periods / 14
• Second, and subsequent, calculations are based on the
prior averages and the current gain loss:
• Average Gain = [(previous Average Gain) x 13 + current
Gain] / 14.
• Average Loss = [(previous Average Loss) x 13 + current
Loss] / 14.
• RSI numbers, a formula will need at least 250 data
points.

14. RSI – Over Bought & Over Sold
• Wilder considered RSI overbought
above 70 and oversold below 30.
• Momentum oscillators,
overbought and oversold readings
for RSI work best when prices
move sideways within a range.
• Momentum oscillators can
become overbought (oversold)
and remain so in a strong up
(down) trend.

15. RSI – Divergence & Swings
• Divergences signal a potential
reversal point because directional
momentum does not confirm price.
• A bullish divergence occurs when the
underlying security makes a lower
low and RSI forms a higher low.
• RSI does not confirm the lower low
and this shows strengthening
momentum.
• A bearish divergence forms when
the security records a higher high
and RSI forms a lower high.
• RSI does not confirm the new high
and this shows weakening
momentum.

16. RSI – Positive Reversals
• Andrew Cardwell developed positive
and negative reversals for RSI, which are
the opposite of bearish and bullish
divergences.
• Cardwell considered bearish
divergences as bull market
phenomenon. In other words, bearish
divergences are more likely to form in
uptrends.
• Similarly, bullish divergences are
considered bear market phenomenon
indicative of a downtrend.
• A positive reversal forms when RSI
forges a lower low and the security
forms a higher low. This lower low is not
at oversold levels, but usually
somewhere between 30 and 50.

17. RSI – Negative Reversals
• A negative reversal is the opposite of
a positive reversal.
• RSI forms a higher high, but the
security forms a lower high.
• Again, the higher high is usually just
below overbought levels in the 50-70
area.
• Chart 12 shows Starbucks (SBUX)
forming a lower high as RSI forms a
higher high.
• Even though RSI forged a new high
and momentum was strong, the
price action failed to confirm as
lower high formed.

18. RSI – Conclusion
• RSI is a versatile momentum oscillator that has stood the test of time. Despite
changes in volatility and the markets over the years, RSI remains as relevant now as it
was in Wilder's days.
• Wilder's original interpretations are useful to understanding the indicator, the work of
Brown and Cardwell takes RSI interpretation to a new level.
• Positive and negative reversals put price action of the underlying security first and the
indicator second, which is the way it should be.
• Bearish and bullish divergences place the indicator first and price action second. By
putting more emphasis on price action, the concept of positive and negative reversals
challenges our thinking towards momentum oscillators.

19. RSI Vigor Index
• An indicator used in technical analysis that measures the conviction of a
recent price action and the likelihood that it will continue.
• Relative Vigor Index (RVI) calculation is based on the idea that in a rising
market the closing price is usually higher than the opening price, and on
the bearish market the closing is usually below the opening price.
• To normalize the index the price fluctuation is divided by the maximum
price range within the bar:
• Relative Vigor Index (RVI) formula: RVI = (CLOSE – OPEN) / (HIGH –
LOW)
• To eliminate occasional price fluctuations (so called “noise”) the
Relative Vigor Index (RVI) oscillator is smoothed by the 10-period simple
moving average. A signal line is also formed as a 4-period moving
average on the oscillator values.
• Bullish divergence / bearish convergence – the main signal pointing to
the weakness of the current trend;
• A good moment to open a sell / buy position is the crossing of the RVI
line by the signal line from above/below once the bullish divergence /
bearish convergence has appeared on the chart; In a flat market an exit
from the overbought / oversold area is a signal to sell / buy.

20. Divergence Index
• Divergence index, the volatility-adjusted difference between two moving averages,
for example, 10 and 40 days. Using general notation:
• 1. Slow average t = 40-day average of the most recent prices
• 2. Fast averaget = 10-day average of the most recent prices
• 3. Difference t = price t − pricet−1
• The standard deviation of the price differences, taken over the slow period of 40,
volatility adjusts the results. The trading rules require a band around zero to trigger
entries where factor = 1.0. By using the standard deviation of DI, the band also adjusts
to changes in volatility.
• The trading rules are
• 1. Buy when the DI moves below the lower band while in an uptrend
• 2. Sell when the DI moves above the upper band while in a downtrend
• 3. Exit longs and shorts when the DI crosses zero

21. Stochastics
• Stochastic Oscillator is a momentum indicator that shows the location of the close
relative to the high-low range over a set number of periods
• The Stochastic Oscillator “doesn't follow price, it doesn't follow volume or anything
like that. It follows the speed or the momentum of price.
• Bullish and bearish divergences in the Stochastic Oscillator can be used to foreshadow
reversals.
• Lane also used this oscillator to identify bull and bear set-ups to anticipate a future
reversal.
• the Stochastic Oscillator is range bound, is also useful for identifying overbought and
oversold levels.

22. Stochastics - Calculations
 A 14-period %K would use the most recent
close, the highest high over the last 14
periods and the lowest low over the last 14
periods.
 %D is a 3-day simple moving average of %K.
This line is plotted alongside %K to act as a
signal or trigger line.

23. Stochastics - Interpretations
 The Stochastic Oscillator measures
the level of the close relative to the
high-low range over a given period
of time.
 The Stochastic Oscillator is above 50
when the close is in the upper half
of the range and below 50 when the
close is in the lower half.
 Low readings (below 20) indicate
that price is near its low for the
given time period.
 High readings (above 80) indicate
that price is near its high for the
given time period.

24. Stochastics - Interpretations
 1. Hinge. A reduction in the speed of either the %K-
slow or %D-slow lines, shown as a flattening out,
indicates a reversal on the next day (Figure 6.17b).
 2. Warning. An extreme turn in the faster %K-slow
(from 2 to 12%) indicates at most two days remaining
in the old trend.
 3. Extremes. Reaching the extreme %K-slow values of 0
and 100 requires seven consecutive days of closes at
the highs (or lows). The test of these extremes,
following a pullback, is an excellent entry point.
 4. Set-up. Although the line chart shows higher highs
and lows, if the %D-slow line has lower lows, a bear
market set-up has occurred. Look for a selling
opportunity on the next rally (Figure 6.17c).
 5. Failure. An excellent confirmation of a change in
direction occurs when %K-slow crosses %D Slow (after
penetrating the extreme level), then pulls back to the
%D-slow line, but fails to cross it again (Figure 6.17d).

25. Stochastics - Bull Bear Set-ups
 A bull set-up is basically the inverse of a
bullish divergence. The underlying
security forms a lower high, but the
Stochastic Oscillator forms a higher high
 the stock could not exceed its prior high,
the higher high in the Stochastic Oscillator
shows strengthening upside momentum.
The next decline is then expected to result
in a tradable bottom.
 A bear set-up occurs when the security
forms a higher low, but the Stochastic
Oscillator forms a lower low.
 Even though the stock held above its prior
low, the lower low in the Stochastic
Oscillator shows increasing downside
momentum.

26. Stochastics - Conclusions
 Momentum oscillators are best suited for trading ranges, they can also be used with
securities that trend, provided the trend takes on a zigzag format.
 The indicator can also be used to identify turns near support or resistance.
 A security trade near support with an oversold Stochastic Oscillator, look for a break above
20 to signal an upturn and successful support test.
 Conversely, should a security trade near resistance with an overbought Stochastic
Oscillator, look for a break below 80 to signal a downturn and resistance failure.
 The settings on the Stochastic Oscillator depend on personal preferences, trading style, and
timeframe.
 A shorter look-back period will produce a choppy oscillator with many overbought and
oversold readings.
 A longer look-back period will provide a smoother oscillator with fewer overbought and
oversold readings.
 The use of Stochastic Oscillator in conjunction with other technical analysis tools. Volume,
support/resistance, and breakouts can be used to confirm or refute signals produced by the
Stochastic Oscillator.

27. William %R
 Developed by Larry Williams, Williams %R is a momentum indicator that is the inverse of
the Fast Stochastic Oscillator.
 Williams %R reflects the level of the close relative to the highest high for the look-back
period.
 In contrast, the Stochastic Oscillator reflects the level of the close relative to the lowest low.
 Williams %R oscillates from 0 to -100. Readings from 0 to -20 are considered overbought.
Readings from -80 to -100 are considered oversold.
 Unsurprisingly, signals derived from the Stochastic Oscillator are also applicable to Williams
%R.
 Fast Stochastic Oscillator and Williams %R produce the exact same lines, only the scaling is
different.

28. William%R - Calculations
 The default setting for Williams %R is 14
periods, which can be days, weeks,
months or an intraday timeframe.
 A 14-period %R would use the most
recent close, the highest high over the
last 14 periods and the lowest low over
the last 14 periods.

29. William %R - Interpretations
 Williams %R reflects the level of the close
relative to the high-low range over a given
period of time.
 Williams %R moves between 0 and -100,
which makes -50 the midpoint.
 A Williams %R cross above -50 signals that
prices are trading in the upper half of their
high-low range for the given look-back
period.
 Low readings (below -80) indicate that price
is near its low for the given time period.
 High readings (above -20) indicate that price
is near its high for the given time period.

30. William%R - Overbought/Oversold
 The oscillator ranges from 0 to -100. No
matter how fast a security advances or
declines, Williams %R will always
fluctuate within this range.
 use -20 as the overbought threshold and -
80 as the oversold threshold.
 These levels can be adjusted to suit
analytical needs and security
characteristics.
 above -20 for the 14-day Williams %R
would indicate that the underlying
security was trading near the top of its
14-day high-low range.
 Readings below -80 occur when a security
is trading at the low end of its high-low
range.

31. William%R - Momentum Failure
 The failure to move back into overbought or
oversold territory signals a change in momentum
that can foreshadow a significant price move.
 The ability to consistently move above -20 is a
show of strength.
 After all, it takes buying pressure to push %R into
overbought territory.
 Once a security shows strength by pushing into
overbought territory more than once, a
subsequent failure to exceed this level shows
weakening momentum that can foreshadow a
decline.
 Prices are above their 6-month average when
%R is above -50, which is consistent with an
uptrend. Readings below -50 are consistent with
a downtrend.

32. The Ultimate Oscillator
 Williams seems to combine his original idea of the A/D Oscillator with a great deal of
Wilder's RSI.
 The Ultimate Oscillator is a momentum oscillator designed to capture momentum across
three different timeframes.
 The multiple timeframe objective seeks to avoid the pitfalls of other oscillators.
 Many momentum oscillators surge at the beginning of a strong advance and then form a
bearish divergence as the advance continues.
 The Ultimate Oscillator attempts to correct this fault by incorporating longer timeframes
into the basic formula.
Williams identified a buy signal a based on a bullish divergence and a sell signal based on
a bearish divergence.

33. The Ultimate Oscillator - Calculation

34. The Ultimate Oscillator - Interpretations
 Buying Pressure and its relationship to the True Range forms the base for the Ultimate Oscillator.
 Williams believes that the best way to measure Buying Pressure is simply subtracting the Close from
the Low or the Prior Close, whichever of the two is the lowest.
 This will reflect the true magnitude of the advance, and hence, buying pressure.
 The Ultimate Oscillator rises when Buying Pressure is strong and falls when Buying Pressure is weak.
 The Ultimate Oscillator measures momentum for three distinct timeframes. Notice that the second
timeframe is double that of the first, and the third timeframe is double that of the second.
 Even though the shortest timeframe carries the most weight, the longest timeframe is not ignored
and this should reduce the number of false divergences.
 This is important because the basic buy signal is based on a bullish divergence and the basic sell
signal is based on a bearish divergence.

35. The Ultimate Oscillator - Buy Signal
 First, a bullish divergence forms between the indicator and security price. This means the Ultimate
Oscillator forms a higher low as price forges a lower low. The higher low in the oscillator shows less
downside momentum.
 Second, the low of the bullish divergence should be below 30. This is to ensure that prices are
somewhat oversold or at a relative extremity.
 Third, the oscillator rises above the high of the bullish divergence.

36. The Ultimate Oscillator – Bear Signal
 First, a bearish divergence forms between the indicator and security price. This means the Ultimate
Oscillator forms a lower high as price forges a higher high. The lower high in the oscillator shows less
upside momentum.
 Second, the high of the bearish divergence should be above 70. This is to ensure that prices are
somewhat overbought or at a relative extremity.
 Third, the oscillator falls below the low of the bearish divergence to confirm a reversal.

37. Chaikin Oscillator
 The Chaikin Oscillator measures the momentum of the Accumulation Distribution Line
using the MACD formula.
 The Chaikin Oscillator is the difference between the 3-day EMA of the Accumulation
Distribution Line and the 10-day EMA of the Accumulation Distribution Line.
 Indicator is designed to anticipate directional changes in the Accumulation Distribution
Line by measuring the momentum behind the movements.
 A momentum change is the first step to a trend change.
 Anticipating trend changes in the Accumulation Distribution Line can help chartists
anticipate trend changes in the underlying security.
 The Chaikin Oscillator generates signals with crosses above/below the zero line or with
bullish/bearish divergences.

38. Chaikin Oscillator - Calculations
 First, calculate the Money Flow Multiplier.
 Second, multiply this value by volume to find Money Flow Volume.
 Third, create a running total of Money Flow Volume to form the Accumulation Distribution Line
(ADL).
 Fourth, take the difference between two moving averages to calculate the Chaikin Oscillator.
 The Accumulation Distribution Line rises when the Money Flow Multiplier is positive and falls
when negative.
 This multiplier is positive when the close is in the upper a half of the period's high-low range
and negative when the close is in the lower half.
 As a MACD type oscillator, the Chaikin Oscillator turns positive when the faster 3-day EMA
moves above the slower 10-day EMA.
 Conversely, the indicator turns negative when the 3-day EMA moves below the 10-day EMA.

39. Chaikin Oscillator- Interpretations
 First and foremost, it is important to remember
that the Chaikin Oscillator is an indicator of an
indicator.
 It measures momentum for the Accumulation
Distribution Line. This makes it at least three steps
removed from the price of the underlying security.
 First, price and volume are reshaped into the
Accumulation Distribution Line.
 Second, exponential moving averages are applied
to the Accumulation Distribution Line.
 Third, the difference between the moving
averages is used to form the Chaikin Oscillator. As
the third derivative, the indicator is more prone to
disconnect from the price of the underlying
security.
The indicator is designed to measure the
momentum behind buying and selling pressure
(Accumulation Distribution Line).

40. Chaikin Oscillator- Buying/Selling Bias
 The Chaikin oscillator can be used to define a general buying or selling bias simply with
positive or negative values.
The indicator oscillates above/below the zero line.
 Generally, buying pressure is stronger when the indicator is positive and selling pressure is
stronger when the indicator is negative.
A rising Chaikin Oscillator reflects a steady increase in buying pressure. A falling Chaikin
Oscillator reflects a steady increase in selling pressure.

41. Chaikin Oscillator- Divergences
A bullish divergence forms when price
moves to new lows and the Chaikin
Oscillator forms a higher low.
This higher low shows less selling
pressure.
It is important to wait for some sort of
confirmation, such as an upturn in the
indicator or a cross into positive territory.
The key is to differentiate the robust
signals from the bogus signals by waiting
for confirmation.
Even with a bullish divergence, selling
pressure outweighs buying pressure until
there is a cross above the zero line.
Buying pressure dominates until there is a
cross into negative territory.

42. True Strength Index (TSI)
Developed by William Blau and
introduced in Stocks & Commodities
Magazine, the True Strength Index (TSI) is
a momentum oscillator based on a
double smoothing of price changes.
By smoothing price changes, TSI captures
the ebbs and flows of price action with a
steadier line that filters out the noise.
Chartists can derive signals from
overbought/oversold readings, centerline
crossovers, bullish/bearish divergences
and signal line crossovers.

43. True Strength Index (TSI) - Calculations

44. True Strength Index (TSI) - Interpretation
 The True Strength Index (TSI) is an oscillator
that fluctuates between positive and negative
territory.
 The bulls have the momentum edge when TSI
is positive and the bears have the edge when
it's negative.
 Signal line crossovers are, however, quite
frequent and require further filtering with
other techniques
 TSI is somewhat unique because it tracks the
underlying price quite well. In other words,
the oscillator can capture a sustained move in
one direction or the other.
 The peaks and troughs in the oscillator often
match the peaks and troughs in price. In this
regard, chartists can draw trend lines and
mark support/resistance levels using TSI. Line
breaks can then be used to generate signals.

45. True Strength Index (TSI) - Interpretation
 The True Strength Index (TSI) is an oscillator
that fluctuates between positive and negative
territory.
 The bulls have the momentum edge when TSI
is positive and the bears have the edge when
it's negative.
 Signal line crossovers are, however, quite
frequent and require further filtering with
other techniques
 TSI is somewhat unique because it tracks the
underlying price quite well. In other words,
the oscillator can capture a sustained move in
one direction or the other.
 The peaks and troughs in the oscillator often
match the peaks and troughs in price. In this
regard, chartists can draw trend lines and
mark support/resistance levels using TSI. Line
breaks can then be used to generate signals.

46. True Strength Index (TSI) - Center Line Crossover
 The centerline crossover is the purest
signal.
 The double smoothed momentum of price
changes is positive when TSI is above zero
and negative when below zero.
 Prices are generally rising when TSI is
positive and falling when TSI is negative.
 TSI often produces support and resistance
levels that chartists can use to identify
breakouts or breakdowns.

47. True Strength Index (TSI) - Overbought/Oversold
 Overbought and oversold levels for the
True Strength Index vary according to a
security's volatility and the period settings
for the indicator.
 The TSI range will be smaller for stocks
with low volatility, such as utilities. The TSI
range will be larger for stocks with high
volatility, such as biotechs.
 Using shorter time periods for the
smoothing will result in a wider range and
choppier indicator line.
 Longer time periods will result in a smaller
range and smoother line. It is the classic
technical analysis tradeoff.
 Chartists get quicker signals and less lag
with shorter periods, but this comes at the
expense of more whipsaws and false

48. True Strength Index (TSI) - Conclusions
 The True Strength Index (TSI) is a unique indicator based on double smoothed price
changes. Price change represents momentum in its truest form.
 The double smoothing with two exponential moving averages reduces the noise and
produces an oscillator that tracks price quite well.
 oscillator signals, chartists can often draw trend lines, support lines and resistance lines
directly on TSI.
 These can then be used to generate signals based on breakouts and breakdowns.
 As with all indicators, TSI signals should be confirmed with other indicators and analysis
techniques.

49. TRIX
 TRIX is a momentum oscillator that displays
the percent rate of change of a triple
exponentially smoothed moving average.
 It was developed in the early 1980's by Jack
Hutson, an editor for Technical Analysis of
Stocks and Commodities magazine.
 With its triple smoothing, TRIX is designed
to filter insignificant price movements.
 A signal line can be applied to look for
signal line crossovers. A directional bias can
be determined with the absolute level.
Bullish and bearish divergences can be used
to anticipate reversals.

50. TRIX - Calculations
 TRIX is the 1-period percentage rate-of-
change for a triple smoothed exponential
moving average (EMA), which is an EMA of
an EMA of an EMA. Here is a breakdown of
the steps involved for a 15 period TRIX.
1. Single-Smoothed EMA = 15-period EMA of
the closing price
2. Double-Smoothed EMA = 15-period EMA of
Single-Smoothed EMA
3. Triple-Smoothed EMA = 15-period EMA of
Double-Smoothed EMA
4. TRIX = 1-period percent change in Triple-
Smoothed EMA

51. TRIX - Interpretation
 TRIX (15,9) is quite similar to MACD (12,26,9). TRIX
is smoother than MACD.
 First, signal line crossovers are the most common
signals. These indicate a change in direction for
TRIX and price momentum. A cross above the
signal line is the first bullish indication, while a
cross below is the first negative implication.
 Second, centerline crossovers provide chartists with
a general momentum bias. The triple-smoothed
moving average is rising when TRIX is positive and
falling when negative. Similarly, momentum favors
the bulls when TRIX is positive and the bears when
negative.
 Third, bullish and bearish divergences can alert
chartists of a possible trend reversal.

52. TRIX - Signal Line Crossovers
 Signal line crossovers are the most common
TRIX signals. The signal line is a 9-day EMA of
the TRIX.
 A bullish crossover occurs when TRIX turns
up and crosses above the signal line.
 A bearish crossover occurs when TRIX turns
down and crosses below the signal line.
 Crossovers can last a few days or a few
weeks, it all depends on the strength of the
move. Due diligence is required before
relying on these frequent signals.
 Volatility in the underlying security can also
increase the number of crossovers.

53. TRIX - Centerline Crossovers
 The centerline crossover indicates when the
cup is half full (bullish) or half empty
(bearish).
 Think of the centerline as the 50-yard line in
a football game. The offense has the edge
after crossing the 50 (midpoint), while the
defense has the edge as long as the ball
remains beyond the 50.
 As with signal line crossovers, these
centerline crossovers produce both good
signals and bad signals.
 The key, as always, is to minimize losses on
the bad signals and maximize gains with the
good signals.

54. TRIX - Divergences
 Bullish and bearish divergences form when the security and the indicator do not confirm one
another.
 A bullish divergence forms when the security forges a lower low, but the indicator forms a higher
low. This higher low shows less downside momentum that may foreshadow a bullish reversal.
 A bearish divergence forms when the security forges a higher low, but the indicator forms a lower
high. This lower high shows waning upside momentum that can sometimes foreshadow a bearish
reversal.

55. TRIX - Conclusions
 TRIX is an indicator that combines trend with
momentum. The triple smoothed moving average
covers the trend, while the 1-period percentage
change measures momentum.
 In this regard, TRIX is similar to MACD and PPO.
The standard setting for TRIX is 15 for the triple
smoothed EMA and 9 for the signal line. Chartists
looking for more sensitivity should try a shorter
timeframe (5 versus 15).
 This will make the indicator more volatile and
better suited for centerline crossovers.
 Chartists looking for less sensitivity should try a
longer timeframe (45 versus 15). This will smooth
the indicator and make it better suited for signal
line crossovers.
 As with all indicators, TRIX should be used in
conjunction with other aspects of technical
analysis, such as chart patterns.