T3 Moving Average is the responsive form of traditional moving averages. Presented in 1998 by Tim Tillson, T3 is also known as the Tillson Moving Averages. The thought behind the development of this technical indicator was to improve lag and false signals, which can be present in moving averages. The T3 moving average is an indicator of an indicator since it includes several EMAs of another EMA. Unlike any other moving average, it adds the so-called volume factor, a value between 0 and 1. Like the SMA, traders typically use this indicator to spot trends and trend reversals.
What is the T3 Moving Average?
The T3 indicator performs better than the ordinary moving averages. The reason for this is T3 Moving Average is built with the EMA (exponential moving average).
Its calculation is based on the sum of single EMA, double EMA, Triple EMA, and so on.
This gives the following equation:
T3 = c1*e6 + c2*e5 + c3*e4 + c4*e3…
Where
- e3 = EMA (e2, Period)
- e4 = EMA (e3, Period)
- e5 = EMA (e4, Period)
- e6 = EMA (e5, Period)
a is the volume factor, with a default value of 0.7 but you can also use 0.618
- c1 = a^3
- c2 = 3*a^2 + 3*a^3
- c3 =6*a^2 – 3*a – 3*a^3
- c4 = 1 + 3*a + a^3 + 3*a^2
When a trend appears, the price action stays above or below the trend line and doesn’t get disturbed from the price swing. The moving of the T3 and the lack of reversals can indicate the end of the trend.
The T3 Moving Average produces signals just like moving averages, and similar trading conditions can be applied.
If the price is above the T3 Moving Average and the indicator moves upward, this is a sign of a bullish trend. Here we may look to enter long.
Conversely, if the price action is below the T3 Moving Average and the indicator moves downwards, a bearish trend appears. Here we may want to look for a short entry.
The parameters of the indicator can be set according to moving averages and your own personal trading preferences.
How to use the T3 Moving Average?
The T3 is considered a swing indicator which is suitable for all timeframes and trading instruments including forex, stocks, commodities, cryptocurrencies, indices, etc.
If the market is trending, we can place entry orders when the price pulls back to the moving average. As moving averages identify support and resistance levels, the price can bounce back from these levels and continue moving in the trending direction. Thus, limiting a trend reversal.
If the market pulls back to a moving average in a bullish trend, it may bounce off the T3 Moving Average and continue to move in the upward direction. This is when we may look to make a buy-entry.
On the contrary, in the bearish trend, The T3 Moving Average could bounce off the pull-backed market and move downward. Hence, giving a potential sell-entry.
The T3 Moving Average also generates signals when you add another T3 with a longer period. When a faster T3 crosses a slower T3 from below, this gives a bullish signal. This condition is also known as the Golden Cross. And, when a faster T3 crosses a slower T3 from above, this produces a bearish signal. This situation is also known as the Death Cross.
T3 Moving Average trading strategy
Trading T3 with trending strategies can generate profitable results. However, as the moving averages can also be uses as reversal indicators, T3 works in reversal strategies.
With the combination of Stochastic Oscillator or MACD, we can use T3 Moving Average for trend reversals.
T3 Moving Average buy strategy
- The price should crossover the indicator upward.
- Wait for the price bar to close bullish before entry.
- Place the stop-loss near the swing low area.
- Exit when the price is moving downwards.
T3 Moving Average sell strategy
- The price should crossover the indicator downwards.
- Wait for the price bar to close bullish before entry.
- Set a stop-loss near the swing low area.
- Exit when the price is moving upwards.
T3 Moving Average Conclusion
The T3 Moving Average is considered superior to traditional moving averages as it is smoother, more responsive and thus performs better in ranging market conditions as well. However, it bears the disadvantage of overshooting the price as it attempts to realign itself to current market conditions.
It incorporates a smoothing technique which allows it to plot curves more gradual than ordinary moving averages and with a smaller lag. Its smoothness is derived from the fact that it is a weighted sum of a single EMA, double EMA, triple EMA and so on. When a trend is formed, the price action will stay above or below the trend during most of its progression and will hardly be touched by any swings. Thus, a confirmed penetration of the T3 MA and the lack of a following reversal often indicates the end of a trend.
The T3 Moving Average indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. The indicator can produce less false signals than a normal moving average although sometimes it exaggerates the price when aligning with the market conditions.
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