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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (39934)	7/18/2003 2:15:21 AM
From: Johnny Canuck	Read Replies (1) \| Respond to of 69260

July 17, 2003 Trix Aren't Just For Kids Given all the recent turbulence and volatility, it's easy to understand why a lot of readers are finding a major challenge on trying to spot trends. This is the reason we use moving average lines, since they filter out a great deal of the meaningless noise. Today we'll look at taking moving averages to an extreme. Let's lay some groundwork first. A moving average, for our purposes anyway, is simply the average price of a stock or index over the last x number of days. You can choose any number of days you like, but the more days you use, the slower your moving average line moves. Why does that matter? If you're using moving average lines as a trade signal, slower moving lines means delayed buy/sell signals (although slower moving lines result in fewer errant signals). On the chart below, we've plotted a 14 day moving average of the S&P 500 in red, and a 50 day moving average in blue. You can see how the faster moving average is more responsive to price changes, yet erratic. The slower moving average is smooth, but slow to change. That's the trade off. Now that we have that premise in our heads, we can focus on today's topic. Obviously any moving average is going to be at least partially delayed. But what if there was a way to make a moving average line considerably smoother, without sacrificing responsiveness? You can! This can be achieved by plotting a moving average of a moving average. In fact, today we're going to examine a moving average of a moving average of a moving average. Or stated in easier terms, we'll be looking at a triple moving average. This is the method used to plot the TRIX (short for TRIple eXponential) moving average indicator. As the lower portion chart below will illustrate, the TRIX lines still move relatively quickly, but are not as erratic as similarly short moving average lines. There is one twist here - the TRIX line is not exactly a moving average of a price. It's actually the moving average of the changes in price. By focusing on price changes rather than the absolute closing prices, the TRIX indicator can be centered around a zero line. Confused? Don't be. This is just a way to put price change data into an oscillating signal line. On our chart we've actually plotted a 14 day TRIX line (in green) and a 21 day TRIX line (in pink). Notice how crosses above and below the zero line for both moving averages often came at the beginning of trends. While crosses above and below the zero line are usually good signals, there is another detail you may want to take note of. Look at what happened when one the faster TRIX line crossed over the slower one. Those crosses also served as advance notice of an upturn or downturn. Notice anything else? When both of these lines are moving in the same direction, it usually coincides with a trend of considerable duration (and when they're not moving in the same direction, the trend often reverses). The TRIX indicator is often overlooked, but as you can see, it's a fairly responsive indicator that doesn't sacrifice a lot of accuracy. That's the power of 'triple-smoothing'. This signal is of particular importance today, as both of the TRIX lines are falling towards zero, which is not a good sign for stocks. ABOUT PRICE HEADLEY Price Headley is the founder and chief analyst of BigTrends.com, which provides daily stock and options recommendations and education. Timer Digest recognized Price and BigTrends.com among the Top 10 stock market timers for 2000. Price has been widely quoted by Barron's, CNBC, The Wall Street Journal and USA Today. Price is also the author of the new book, Big Trends in Trading: Strategies to Master Major Market Moves. If you want Price to answer any of your questions on future web site updates, send an email to askprice@bigtrends.com or call 1-800-BIGTRENDS (1-800-244-8736). DISCLAIMER: THIS COLUMN IS AN INFORMATIONAL AND EDUCATIONAL SERVICE ONLY. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. BigTrends.com, Price Headley and Hard Right Edge shall not be liable for any damages or costs of any type arising out of or in any way connected with the services of the company.