What Is Triple Exponential Moving Average Envelope
The triple exponential moving average is a modified moving average that was created in the mid-1990s by Patrick Mulloy. This average was developed to avoid the inevitable issue of lag that traders encounter when using oscillators or exponential moving averages. What makes the TEMA so effective is that it uses successive EMAs of EMAs, and the formula includes an adjustment for lagging.
Triple Exponential Moving Average Envelope Indicator
The TEMA Envelope is a trend indicator and is really helpful in reducing or removing lag that traders often encounter while utilising oscillators or EMAs.
How To Calculate Triple Exponential Moving Average Envelope
Here’s how to calculate the TEMA Envelope
TEMA Envelope =( 3 * ema – 3 * ema(ema) + ema(ema(ema))) +-2%
Why Use Triple Exponential Moving Average Envelope
The TEMA responds faster to near-term price changes than a normal EMA. Adding an envelope to the TEMA reduces the chances of whipsaw trades, where an asset’s prices change suddenly. The envelope is used to smooth the data and identify the underlying price trend, amplifying the useableness of the TEMA.
How To Use Triple Exponential Moving Average Envelope
The TEMA envelope serves as a trend indicator. The TEMA envelope is predominantly used for trading purposes, with trends sustained over long periods of time. Using the TEMA envelope with various other oscillators or technical indicators can help traders and analysts interpret sharp price fluctuations and evaluate volatility.
Defining a Bullish Scenario to generate a buy signal:
- When the price crosses above the TEMA envelope, it indicates that the current price is greater than the average of the defined period; hence the market is in an upward trend.
- When the shorter period moving average envelope crosses over the longer time moving average, it indicates the start of a new uptrend.
Defining a Bearish Scenario to generate a sell signal:
- When the price crosses down the TEMA, it indicates that the current price is lower than the average of the defined period; hence the market is in a downward trend.
- When the shorter period moving average crosses down the longer time moving average, it indicates the start of a new downtrend.
Building Triple Exponential Moving Average Envelope Trading Strategy On Mudrex:
As discussed above, lets first write our entry/exit conditions so that we know what to do:
BUY: When price crosses up the TEMA.
SELL: When price crosses down the TEMA.
Overall Strategy: The overall strategy on mudrex looks like this
Testing: We can now run a quick back-test to see how our strategy performs
A few quick references below: