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What Is the Triple Exponential Moving Average (TEMA)?
Let me explain the triple exponential moving average, or TEMA, directly to you. It's designed to smooth out price fluctuations, making it easier for you to spot trends without the usual lag that comes with traditional moving averages. TEMA achieves this by calculating multiple exponential moving averages of the original EMA and then subtracting some of that lag.
You can use TEMA just like other moving averages. It helps you identify the direction of trends, signal potential short-term changes or pullbacks, and even act as support or resistance. I recommend comparing it with the double exponential moving average, or DEMA, to see the differences.
Key Takeaways
Here's what you need to know about TEMA: it relies on multiple EMA calculations and removes lag to create a quick-reacting trend-following indicator. You can use it to spot trend directions, potential short-term shifts or pullbacks, and levels of support or resistance. When the price sits above the TEMA, it confirms an uptrend for you; when it's below, it confirms a downtrend.
Formula and Calculation for the TEMA
The formula for the triple exponential moving average is straightforward: TEMA equals (3 times EMA1) minus (3 times EMA2) plus EMA3, where EMA1 is the initial exponential moving average, EMA2 is the EMA of EMA1, and EMA3 is the EMA of EMA2.
Steps to Calculate TEMA
- Choose a lookback period—this determines how many periods go into the first EMA; fewer periods like 10 track short-term trends closely, while more like 100 highlight longer-term ones.
- Calculate the EMA for that lookback period; this becomes EMA1.
- Calculate the EMA of EMA1 using the same lookback period; this is EMA2.
- Calculate the EMA of EMA2 with the same period; this is EMA3.
- Plug EMA1, EMA2, and EMA3 into the TEMA formula to get your triple exponential moving average.
What Does the TEMA Tell You?
TEMA reacts to price changes faster than a traditional moving average or even a standard EMA because it subtracts out some of the lag in its calculation. You can apply it in the same ways as other moving averages. The angle of the TEMA line shows you the short-term averaged price direction: if it's sloping up, the price is moving up; if down, the price is moving down.
There's still a bit of lag, so when prices shift quickly, the indicator might not adjust its angle right away. Also, a larger lookback period means TEMA will be slower to change direction when prices do.
The TEMA and Trend Direction
The position of TEMA relative to the price gives you clues about trend direction. Generally, if the price is above TEMA, it confirms a rising trend for that lookback period; if below, it confirms a falling trend. You need to pick a lookback period where this holds true most of the time, so choose one that fits the asset you're trading if you're using TEMA to identify trends.
Since TEMA helps spot trend directions, it can also signal changes. If the price is above the average and then drops below, that might mean the uptrend is reversing or entering a pullback. If it's below and moves above, it signals a rally. You could use these crossover signals to decide on entering or exiting positions.
The TEMA for Support and Resistance
TEMA can also serve as support or resistance for the price. For instance, in an overall rising price, during pullbacks it might drop to the TEMA and bounce off, continuing upward. This depends on the right lookback period for your asset. If you're using TEMA this way, check that it has provided support or resistance in the past; if not, it probably won't in the future.
Some traders use TEMA with a small lookback period as an alternative to the price line itself. It filters out noise from candlestick or bar charts, much like a simple line chart would.
The TEMA vs. the Double Exponential Moving Average (DEMA)
Both TEMA and DEMA aim to cut down the lag in average-based indicators, but TEMA reduces it more than DEMA. The DEMA formula differs: it's twice the EMA of price minus the EMA of that original EMA, so it gives you slightly different information and signals.
Limitations of Using the TEMA
Even though TEMA cuts lag, it still has some issues common to other moving averages. They're most useful in trending markets with sustained moves in one direction. In choppy, back-and-forth markets, TEMA might not help much and could give false signals, as crossovers may not lead to lasting moves if the price stays rangebound.
The reduced lag might help some traders but not others. If you prefer indicators that don't react to every little price change, TEMA's quick response could be a drawback. It tracks price more closely than a simple moving average, meaning smaller moves might cross it when they wouldn't cross an SMA. Investors often avoid frequent trading and don't want to exit positions without a major trend shift.
No moving average is inherently better; it depends on your preference and strategy. Use TEMA with other analyses like price action, technical indicators, and fundamental analysis.
Example of the TEMA
Take the SPDR S&P 500 ETF as an example where I've applied TEMA. It smooths the price action, and its angle helps you identify the overall trend even amid daily fluctuations. (Note: Imagine an image here showing the chart with TEMA overlaid.)
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