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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: HairBall who wrote (20732)	6/19/1998 2:22:00 PM
From: Jurgen	Read Replies (1) \| Respond to of 94695

maybe this can help: Taken from Stocks & Commodities, V. 10:12 (537-540): Looking At Momentum With Trix -------------------------------- Looking At Momentum With TRIX The TRIX oscillator has unique properties that make it ideal for identifying direction of trend as well as cyclical entry points. Last month, Ed Downs showed us how various oscillators can be tuned to the personality of an individual stock through optimization. This month, he'll explain the use of a derivative technique using the TRIX oscillator. by Ed Downs If you smooth an exponential moving average (EMA) I of the closing price twice (taking the EMA of the EMA of the EMA) and then plot the percentage change per period on the y-axis, you'll have one version of the TRIX. The original TRIX is the one-day difference of the triple exponentially smoothed log of the closing prices. This value is then multiplied by 10,000 to aid in plotting the line. The two different methods will plot virtually identical curves. The calculations for TRIX found in MetaStock Professional can be represented as: E1 = EMA(d,p) d = initial data array (that is, close) E2 = EMA(E1,p) p = period of moving average E3 = EMA(E2,p) TRIX = ((E3(today)-E3(yesterday))/E3(yesterday)))(100) where EMA(d,p) represents the exponential moving average of data values d over p time periods. To understand how TRIX works, we can look at a progressive development of the indicator. The first part of Figure 1 shows E1 (from the formulas above) for 14 days. The second part of Figure 1 plots E2 for 14 days, and the third part of Figure 1 depicts E3 for 14 days. Each time we take an exponentially smoothed moving average of the previous value, we get a smoother curve. That's what triple smoothing is supposed to do for us-filter out all the cycles that are less than the value of our exponential moving average period (in this case, 14 days). If we take E3 and plot the daily percentage rate of change, we get TRIX as shown in Figure 2. Because TRIX represents the percentage change in the smoothed average, positive values indicate a rising trend and negative values indicate a falling one. Trades are placed when the TRIX indicator changes direction, which is normally detected using a moving average crossover system. We buy when TRIX goes above its moving average to the upside and sell when it goes below the moving average. Using MetaStock's system tester, we get the trades shown in Figure 2. (See sidebar, "TRIX momentum in MetaStock," for details on system testing.) We can define a system test in which trades are taken on peak reversals of TRIX momentum above and below an arbitrary signal level. The arrows in Figure 3 show the results of such a test. We see the result. Not bad! The TRIX oscillator does a decent job of identifying significant turning points in the stock. However, quite a few of the trades are two to five days late. This lag is one of the problems inherent in moving average-based trading systems. Notice, though, how smoothly TRIX transits from up to down. The curve is smooth because TRIX is the rate of change of the triple-smoothed EMA. Consider what would happen if we plotted the rate of change or momentum of TRIX from one day to the next. We can define a simple TRIX momentum formula as: TRIX momentum = TRIXtoday - TRIXyesterday This formula is plotted in Figure 3. The peaks represent points where the day-to-day momentum reaches a maximum (plus or minus). In other words, these are the points at which the TRIX value is slowing down in its current direction. Trading these points will give us an early signal because we're catching the place where TRIX is running out of steam before it reverses. In mathematical terms, the TRIX momentum is the second derivative of the triple-smoothed moving average. We can define a system test in which trades are taken on peak reversals of TRIX momentum above and below an arbitrary signal level. The arrows in Figure 3 show the results of such a test. Now compare the trades in Figures 2 and 3. In virtually every case, the trades generated by TRIX momentum are earlier -in some cases by as much as a week! TRIX MOMENTUM AND PRICE CYCLES Last month, I explained that oscillator cycles can be determined using data from the immediate past to find high-probability trades in the immediate future. How does this apply to the period used in the TRIX calculation? Figures 4 through 7 show four stocks (Alcoa, Apple Computer, American International Group and Avnet) that have been optimized in a back test and then forward tested. In studying these figures, two phenomena related to the stocks' personalities surface. First, in each case, the forward test tends to correlate with the back test-that is, approximately the same quantity and quality of trades were generated in both time periods. This lends credence to the idea that a stock's personality persists over time. Second, as with other oscillators, TRIX momentum works better on some stocks than others. Obviously, AlcoA (AA) was a superb candidate for this approach. On the other hand, Apple Computer (AAPL) tends to trend more, so the oscillator trading signals were less reliable. Again, each stock's personality determines its propensity to trade successfully using the oscillator. CONCLUSION As an indicator, TRIX momentum can alert traders to an early trading opportunity. By optimizing TRIX over past time periods for each stock in our database and then screening for TRIX momentum trading signals, we can identify opportunities that can be verified for trend direction and for confirmation by other oscillators. As with all indicators, some stocks work better than others. Since stocks tend to repeat their behavior in the future, we are provided with an even greater degree of predictive value. Ed Downs has been studying the stock market and trading for 12 years. He holds bachelor's and master's degrees in engineering from the University of Texas and is president of Nirvana Systems, Inc., which specializes in automation of trading technology for individual investors using MetaStock Professional and other software.