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. The purpose was to reduce the lag among indicators.
What is the Triple Exponential Moving Average (TEMA)?
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)
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.
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
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 sop-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 sop-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 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.
I would prefer to use the majority of technical indicators such as the Triple Exponential Moving Average indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.
The Triple Exponential Moving Average indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Triple Exponential Moving Average indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Triple Exponential Moving Average indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.