The Triple Exponential Moving Average is used to determine trends in various markets and can be applied to trading forex, stocks, commodities, cryptocurrencies and more. Patrick Mulloy developed it and published in 1994 for the first time in the issue of “Technical Analysis of Stocks and Commodities”. Mulloy found that by creating a unique combination of a simple exponential moving average, double exponential moving average and a triple exponential moving average. One of the common problems of trading with EMAs or oscillators has always been the inevitable issue of lag encountered in trading decisions. The TEMA indicator was developed in order to deal with this problem.
What is the Triple Exponential Moving Average (TEMA)?
It is a type of trend-based indicator that is used to get information about the current trend in the market. It tells us about the uptrend and downtrend market. It allows us to make trading decisions according to the current market scenario. It is basically designed after merging three Exponential Moving Average indicators.
The Triple Exponential Moving Average is used in the same way as other moving averages are. It is trend-following indicator, however with smaller lag when compared to the EMA and SMA and some trader may prefer using it because of that. Mulloy found that the inputs of MACD if used with a modified moving average, could produce a lot better result.
Triple Exponential Moving Average Formula
The formula for the Triple Exponential Moving Average is calculated as follws:
(3 * EMA) – (3 * EMA of EMA) + EMA of EMA of EMA)
Where:
EMA = n-day exponential moving average
Above is a 4-hour chart that has a 20-period TEMA and a 20-period SMA. The blue line is the SMA and the red line is the Triple Exponential Moving Average. Observe that both the indicators have the same number of periods, but you can clearly find the difference in their values.
How to use the Triple Exponential Moving Average?
As you may have guessed, the core use of the TEMA trading indicator is the same like other moving average indicators – the price crossover. If the price crosses the TEMA line to the upside, we consider it a bullish trend and if it crosses to the downside, we consider it a bearish trend.
The main principles of trading this indicator could be summarized in two points:
- A trend is considered bullish when price moves above the indicator
- A trend is considered bearish when price moves below this indicator
Bearish Cross in TEMA
The bearish cross exists when the price closes below the Triple Exponential Moving Average. When the price breaks the TEMA in the downward direction, it is an indication that the market may be heading down for possible short trading opportunities.
The above image shows that the price closes under the Triple Exponential Moving Average and continues to go down.
Bullish Cross in TEMA
The bullish cross exists when the price closes above the Triple Exponential Moving Average. When the price breaks the TEMA in the upward direction, it is an indication the the market may be heading up for possible long trading opportunities.
As you can see in the image above, the price kept moving on the upside after it broke above the TEMA line.
Triple Exponential Moving Average trading strategy
The indicator is a trend indicator. In light of its tendency to smooth out any short term distortions, it will be hard to use in a ranging market where short term fluctuations within the confines of the range pattern create the greatest trading opportunities.
A triple moving average crossover is a bullish signal that indicates that the price may rise. The price is generally in an established trend (bullish or bearish) for the time horizon represented by the moving average periods.
In general, the longer the trend lasts, the easier it is to trade it with TEMA. In a longer lasting trend we can ignore periods of volatility, and the signals of the indicator are easier to use. Conversely, the more volatile the trend is, the less usable this indicator becomes.
We are going to present an easy forex trading strategy for beginners. We use Stochastic Oscillator with the TEMA indicator for further confirmation.
Triple Exponential Moving Average buy strategy
- The price should close above the Triple Exponential Moving Average (20).
- The Stochastic oscillator value should be near 20.
- Place the stop-loss near swing low.
- Exit the trade when the price falls below the TEMA line.
Triple Exponential Moving Average sell strategy
- The price should close below the Triple Exponential Moving Average (20).
- The Stochastic oscillator value should be near 80.
- Place the stop-loss near swing high.
- Exit the trade when the price rises above the TEMA line.
Triple Exponential Moving Average conclusion
Patrick Mulloy developed the TEMA indicator with a primary objective to determine the trends in any market. The indicator is really simple same as any other moving average. It tells whether the trend is bearish or bullish. However, TEMA is little refined than other forms of moving averages as it includes three different types of moving averages. The purpose was to reduce the lag among indicators.
The Triple Exponential Moving Average indicator can be used on your forex trading platform charts to help filter potential trading signals as part of an overall trading strategy.
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