What Is Triple Exponential Moving Average
The triple exponential moving average is a modified moving average 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 (TEMA) Indicator
The TEMA is a trend indicator and can help identify trend direction, signal potential short-term trend changes or pullbacks. It provides support or resistance. The TEMA is comparable with the double exponential moving average (DEMA).
How To Calculate Triple Exponential Moving Average (TEMA) Indicator
TEMA = 3 * ema – 3 * ema(ema) + ema(ema(ema))
The TEMA reacts to price changes quicker than a traditional MA or EMA will. This is because some of the lag has been subtracted out in the calculation.
Why Use Triple Exponential Moving Average (TEMA)
The TEMA location concerning the price of the asset provides indications of the trend direction. Usually, if the price is above TEMA, it confirms that the price is rising for that lookback period. Moreover, since the TEMA can help identify trend direction, it also helps in predicting and identifying trend changes. It also may provide support or resistance for the price.
How To Use Triple Exponential Moving Average (TEMA)
The TEMA serves as a trend indicator. The TEMA is most efficiently used for trading purposes with trends sustained over long periods of time. Using the TEMA 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, 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 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 (TEMA) 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
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