Why Is the Triple Exponential Moving Average (TEMA) Important for Traders and Analysts?
Key Takeaways
- The triple exponential moving average (TEMA) is a modified moving average designed to smooth large price fluctuations.
- This makes it easier to identify trends without the lag associated with traditional moving averages.
- It does this by taking multiple exponential moving averages (EMA) of the original EMA and subtracting out some of the lag.
Functions of the Triple Exponential Moving Average
The treble exponential moving average is a modified affect average that was created in the mid-1990s by Patrick Mulloy. This average was developed to avoid the inevitable issue of slowdown that traders encounter when using oscillators or exponential travel averages ( EMAs ). Using multiple moving averages of price smooths out short-run fluctuations. What makes the TEMA indeed effective is that it uses consecutive EMAs of EMAs, and the recipe includes an allowance for lagging.
The TEMA serves as a drift indicator. It is not as successfully employed in a ranging market. The TEMA is most well used for trade purposes with trends sustained over long periods of clock time. With longer trends, analysts can more easily filter out and neglect periods of volatility. Using the TEMA with a variety show of other oscillators or technical indicators can help traders and analysts to interpret acute price fluctuations and measure excitability. Some analysts recommend a combination of the moving average convergence divergence ( MACD ) and the TEMA for evaluating marketplace trends .
Calculating the Triple Exponential Moving Average
To calculate the TEMA, once an analyst has chosen a fourth dimension period, he calculates the initial EMA. then, a second EMA, the double exponential moving average ( DEMA ), is calculated from the initial EMA. The final step in calculating the TEMA is to take a third gear EMA from the DEMA .
TEMA =(3∗EMA1)−(3∗EMA2 )+EMA3
where :
- EMA1 = Exponential Moving Average (EMA)
- EMA2 =EMA of EMA1
- EMA3 = EMA ofEMA2
- Choose a lookback period. This is how many periods will be factored into the first EMA. With a fewer number of periods, like 10, the EMA will track price closely and highlight short-term trends. With a larger lookback period, like 100, the EMA will not track price as closely and will highlight the longer-term trend.
- Calculate the EMA for the lookback period. This is EMA1.
- Calculate the EMA of EMA1, using the same lookback period. For example, if using 15 periods for EMA1, use 15 in this step as well. This is EMA2.
- Calculate the EMA of EMA2, using the same lookback period as before.
- Plug EMA1, EMA2, and EMA3 into the TEMA formula to calculate the triple exponential moving average.
Why Is TEMA Important for trade ?
The TEMA reacts to price changes quicker than a traditional MA or EMA will. This is because some of the imprison has been taken out in the calculation. A TEMA can be used in the same ways as other types of moving averages. chiefly, the commission TEMA is angled indicates the short-run ( averaged ) price direction. When the line is sloping up, that means the price is moving up. When it is angled down, the price is moving gloomy. There is still a belittled amount of lag in the index, then when price changes quickly the indicator may not change its fish immediately. besides, the larger the lookback period, the slower the TEMA will be in changing its slant when price changes direction .
The TEMA may besides provide indications of digest or resistance for the price. For exercise, when the monetary value is rising overall, on pullbacks it may drop to the TEMA, and then the price may appear to bounce off of it and keep ascend. This movement is reliant upon the proper look back menstruation for the asset. If using the TEMA for this purpose, it should have already provided corroborate and resistor in the past. If the indicator did n’t provide support or resistance in the by, it credibly wo n’t in the future .