Technical Indicators: T (part 2)
TRIX - Triple Exponential Moving Average
The Triple Exponential Moving Average (TRIX) is an oscillator used to identify oversold and overbought markets as well as a momentum indicator. For use as an oscillator look for a positive value to indicate an overbought market and a negative value indicate an oversold market. When TRIX is used as a momentum indicator, a positive value suggests increasing momentum just as a negative value suggests momentum is decreasing. Some believe that the TRIX crossing above the zero line is a buy signal and a closing below the zero line is a sell signal. Divergence between price and TRIX can also indicate significant turning points in the market.
Two advantages of TRIX over other trend indicators is its filtration of market noise and a tendency to be a leading rather than a lagging indicator. By using triple exponential smoothing, "insignificant" cycles are filtered out. It can lead a market because it measures the difference between each bar's smoothed version of the price information. When used as a leading indicator, TRIX is best used in conjunction with another market-timing indicator so as to reduce false signals.
To calculate TRIX, an exponential moving average of the data is taken for the given period. Then, an exponential moving average is taken of that result for the same period, followed by another for the second result. The percent change in value of the third moving average is then returned as the value of the TRIX.
The value of the TRIX at the beginning of a data series is considered to be zero. Since it uses exponential moving averages, its initial values will include the zero value in its calculation. You may want to ignore values before three times the period has completed.
The Typical Price
The Typical Price function calculates the average of the high, low, and closing prices for the day via a simple, single-line plot. As with other price adjustment functions, the typical price provides a simplified view of the trading prices for the day. It can be used to smooth out some of the volatility of the closing price since it includes information for the entire trading day rather than specifically the end of the day.
The Typical Price can be used anywhere a closing price or other single price field would be used. For example, it could be compared to a moving average of its value to determine when a security is trending upward or downward. The Typical Price is a building block of the Money Flow Index.
The Typical Price indicator is calculated by adding the high, low, and closing prices together, and then dividing by three. The formula is:
Typical Price = ( High + Low + Close / 3 )
Trade Volume Index
Similar to the On Balance Volume indicator, the Trade Volume Index (TVI) uses price and volume to show whether a security is being purchased or sold. The On Balance Volume (OBV) method works well with daily prices, but it doesn't work as well with intraday tick prices. The difference between the OBV and the TVI is that the TVI makes use of intraday tick data while the OBV uses of end of day data.
Tick prices, especially stock prices, often display trades at the bid or ask price for extended periods without changing. This creates a flat support or resistance level in the chart. During these periods of unchanging prices, the TVI continues to accumulate this volume on either the buy or sell side, depending on the last price change.
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The TVI can identify whether a security is being accumulated or distributed. When the TVI is trending up, trades are taking place at the asking price as buyers accumulate the security. When the TVI is trending down, it shows that trades are taking place at the bid price as sellers distribute the security.
When prices are flat and the TVI is rising, look for prices to start to move to the upside. When prices are flatand the TVI is falling, look for prices to drop.
The Trade Volume Index is calculated by adding each trade's volume to a cumulative total when the price moves up by a specified amount, and subtracting the trade's volume when the price moves down by a specified amount. That specified amount is known as the "Minimum Tick Value." To calculate the TVI you must first determine if prices are being accumulated or distributed:
Change = Price - Last Price
MTV = Minimum Tick Value
Accumulation when Change > MTV or Distribution when Change < MTV
With direction determined, calculate the TVI:
Accumulation: TVI = TVI + Today's Volume
Distribution: TVI = TVI - Today's Volume
TRIN (Arms Index)
The Arms Index is a market indicator that illustrates the relationship between the number of stocks that increase or decrease in price (advancing/declining issues) and the volume associated with stocks that increase or decrease in price (advancing/declining volume). To calculate it, divide the Advance/Decline Ratio by the Upside/Downside Ratio.
The Arms Index is primarily a short-term trading tool, showing whether volume is flowing into advancing or declining stocks. A reading below 1.0 indicates more volume in rising stocks and is positive. A reading above 1.0 reflects more volume in declining issues and is negative. The Arms Index is a contrary indicator that trends in the opposite direction of the market. It can be used for intraday trading by tracking its direction and for spotting signs of short term market extreme.
The Arms Index was developed by Richard Arms in 1967. Over the years the index has been referred to by a number of different names. When Barron's published the first article on the indicator in 1967 they called it the Short-term Trading Index. It has also been known as TRIN (an acronym for TRading INdex).
According to Arms, a 10 day average of the Arms Index above 1.20 is considered oversold, while a 10 day Arms value below .70 is overbought, although those numbers may shift depending on the overall trend of the market. Other interpretations seek to use the direction and absolute level of the TRIN to determine bullish and bearish scenarios. In the momentum driven markets, the TRIN can remain oversold or overbought for extended periods of time.
True Strength Index
The True Strength Index (TSI) is a momentum-based indicator, developed by William Blau. Designed to determine both trend and overbought/oversold conditions, the TSI is applicable to intraday time frames as well as long term trading.
The True Strength Index is a variation of the Relative Strength indicator. It uses a double smoothed exponential moving average of price momentum to minimize choppy price changes and highlight spot trend changes with little or no time lag. An increasing True Strength value indicates increasing momentum in the direction of the price movement.
Long Term - First Period used in the double exponential smoothing of the momentum.
Short Term - Second Period used in the double exponential smoothing of momentum.
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