The Concept Behind Triple Exponential Moving Average (TEMA)
The Triple Exponential Moving Average (TEMA) operates as a refining mechanism for the vanilla Exponential Moving Average (EMA), trimming down the lag associated with traditional moving averages. Crafted ingeniously by Patrick G. Mulloy in 1994, TEMA was designed to smooth price data and deliver more responsive indicator results. The principal charm of TEMA lies in its composition—it deploys not one, not two, but three EMAs, each layered upon the last, to produce a trend-following dynamo.
Key Takeaways
- Swift Response: TEMA’s threefold EMA architecture allows it to snap to price changes more swiftly than its simpler cousins.
- Trend Identification: With bull’s-eye precision, TEMA points out the market’s direction. Riding high? Uptrend confirmed. Dipping low? It’s likely a downturn.
- Signal Clarity: Wave goodbye to noise as TEMA helps highlight significant movements and potential retracements.
- Support and Resistance Levels: It’s not just about trends—TEMA can act as a floor or ceiling, influencing trade decisions.
Formula and Calculating the TEMA Magic
In the enchanted land of trading, formulas reign supreme, and TEMA is no exception. Here’s the sorcery involved:
TEMA = (3 * EMA1) - (3 * EMA2) + EMA3
Where:
- EMA1: The first EMA, setting the foundation.
- EMA2: EMA of EMA1, the plot thickens.
- EMA3: EMA of EMA2, the grand finale.
Steps to Enlightenment:
- Choose Your Path (Lookback Period): Short paths (e.g., 10 periods) offer intimate, up-to-the-minute insights. Longer paths (e.g., 100 periods) provide a broader, more serene view.
- Construct the Building Blocks: Calculate EMA1 based on your chosen path.
- Add Layers: From EMA1, derive EMA2 and then EMA3, using the same lookback.
- The Great Assembly: Combine these elements using the TEMA formula above.
Leveraging TEMA in Your Trades
Trend Direction and Changes
TEMA doesn’t just indicate trends—it’s a harbinger of changes. A rising TEMA suggests an uptrend; a falling TEMA warns of a downturn. If the price cruises above the TEMA, it’s all systems go for rise; below it suggests a decline.
Adjusting the Lookback Period
Remember, TEMA is only as good as its settings. Choose a lookback period that resonates with your trading rhythm and the asset’s characteristics to ensure TEMA truly captures the trend essence.
TEMA: Not Just a Line, But a Market Guide
From pinpointing trend reversals to offering potential support and resistance levels, TEMA is like GPS for traders—guiding, informing, and occasionally recalculating when you miss a turn.
Related Terms
- EMA (Exponential Moving Average): The simpler foundation on which TEMA is built.
- SMA (Simple Moving Average): The straightforward average, no frills attached.
- MACD (Moving Average Convergence Divergence): Another trend-following buddy, useful for spotting changes in the strength, direction, momentum, and duration of a trend.
Suggested Literature
For those aspiring to ascend the summits of technical analysis, consider these scholarly tomes:
- “Technical Analysis of the Financial Markets” by John Murphy—A comprehensive guide spanning various indicators, including TEMA.
- “Trading for a Living” by Dr. Alexander Elder—Insights into trading psychology, tactics, and technical tools.
With TEMA, traders can smooth out the noise and focus on what truly matters—the trend. So go ahead, let TEMA be your market mantra, and may your trading be as smooth as your moving averages.
