Hi Friends, great people of Steemit community, I welcome you all to my blog as I join the host of other steemians to participate in this week's SCA lesson. I will be making my contribution on a post shared by professor @fredquantum on "Crypto Trading Strategy with Triple Exponential Moving Average (TEMA) Indicator".
What is your understanding of Triple Exponential Moving Average (TEMA)?
The Triple Exponential Moving Average is an advancement built on the existing Moving Averages to correct its limitations. This concept was developed by Patrick Mulloy in a quest to strengthen and eliminate the lagging nature of the existing Moving Averages as well as the noise associated with the market that hampers its signals.
It is a trend-based technical indicator that uses the 3 EMA's in the calculation of its value which hitherto filters and smoothers the signals from it vis-a-vis other indicators. It is observed to also use two TEMA to read some of its signals like making buy and sell positions as well uses the crossover trading strategy.
The crossover trading strategy entails that one shorter TEMA setting and Longer TEMA setting are combined. And when the shorter time frame indicator line crosses above the longer period line settings, this indicates an Uptrend or Bullish crossover. When the same shorter period is observed crossing below the longer period, this shows Downtrend or bearish.
In either case, this allows us to make trade positions. When it is an uptrend, we are expected to make a Buy trade entry. But when it is on the downtrend we are to take a Sell trade entry.
Some Key Highlights on TEMA
- It is a trend-based technical indicator that was developed to smother the price value and other market noises.
- TEMA concept ensures that it eliminates lagging in its technical indicator unlike what is obtainable in the existing Moving Averages.
- it is calculated by using three (3) EMAs as well as substracting lags.
- It determines trend direction as well act as dynamic support and resistance level.
How is TEMA calculated? Add TEMA to the crypto chart and explain its settings. (Screenshots required).
Calculation for TEMA
In my description and highlights about the TEMA, I mentioned for this indicator to give a smoother signal it takes into account the use of three EMAs to achieve this fit. Hence, we will see this applicable in this calculation.
TEMA = (3 x EMA¹) - (3 x EMA²) + (EMA³)
WHERE:
EMA¹ = Exponential Moving Average
EMA² = EMA of EMA¹
EMA³ = EMA of EMA²
EMAs calculated for the TEMA are set on the same periods. This is to avoid any form of data inconsistency and inaccuracy.
TEMA set-up in a Chart
- launch the trading view site
- cluck on the indicator icon from the toolbar
- search for TEMA and click on it to launch the indicator into the chart
- From the setting icon on the indicator, click to load options
- We have the Inputs, Style, and visibility. Click on input to change your settings from default 9 periods to 25.
- then click on the Ok button to effect changes done.
Compare TEMA with other Moving Averages. You can use one or two Moving Averages for in-depth comparison with TEMA.
Moving Averages has mutated in different forms, and the cause of this is to get an all-important trading tool closer to what traders want. In the quest of proffering a solution, the system also ends up creating one.
The SMA uses the simple arithmetic mean in deriving its average price value in a given period, whereas the EMA uses or places more emphasis on the recent price values in deriving the average value of market price. The TEMA uses three (3) EMA values in deriving the average value of its market price.
TEMA gives a more precise and smoother signal vis-a-vis other moving averages like the SMA and EMA.
The TEMA is a more trend-based indicator; it reacts more quickly relative to price changes than the SMA and EMA due to subtraction of the lag factor while calculating its averages.
Explain the Trend Identification/Confirmation in both bearish and bullish trends with TEMA (Use separate charts). Explain Support & Resistance with TEMA (On separate charts). (Screenshots required).
Trend Identification and Confirmation (TEMA)
Given the fact that Moving Averages are trend-based technical indicators, the TEMA which happens to be more advanced in this regard is quicker in following price trends. This provides a much better direction in knowing the trend lines during the trade.
Trends in a Bullish Scenario
We already know when a trend is said to be bullish, it is observed in an upward direction. Before we can say this in the TEMA scenario, we must have observed that the price trend is above the TEMA line. Therefore, whenever a trend is seen above the TEMA indicator line, we can say there is an uptrend or a bullish trend scenario.
In all of this, both the TEMA line and price trend are observed in an uptrend.
Trends in a Bearish Scenario
Before we can say trends are in a Bearish state scenario, we must have observed that the price trend is below the TEMA line. Therefore, whenever a trend is seen below the TEMA indicator line, we can say there is a downtrend in occurrence or a bullish trend scenario.
In all of this, both the TEMA line and price trend are observed in a downtrend.
Explain Support & Resistance with TEMA
Support and resistance level are usually strong price zones where we have more buy and sell activities. At this level, we have price trend retesting at the close of this indicator line. This retest or pullbacks that are usually observed in these areas are trade signals of trend reversals which can either be bullish or bearish trend reversals.
Furthermore, these levels serve as either dynamic support or resistance points which can as well be used as but and sell trade orders. This is because, each time the price trend rebounds, we can only anticipate trends going in the direction of rebound.
In an Uptrend Scenario which happens to be our Resistance level, price trend and TEMA indicator line are observed in the upward direction but at this resistance point, the TEMA indicator line is seen above the price trend line and hence rebounding the trend towards the opposite direction. In this case, we should always expect a trend reversal downwards.
In a Downtrend Scenario which happens to be our Support level, price trend and TEMA indicator line are observed in the downward direction but at this support point, the TEMA indicator line is seen below the price trend line and hence rebounding the trend towards the opposite direction. In this case, we should always expect a trend reversal upwards.
Explain the combination of two TEMAs at different periods and several signals that can be extracted from it. Note: Use another period combination other than the one used in the lecture, explain your choice of the period. (Screenshots required).
Combining two moving averages had been one of its advantages while using this trading tool. While combining the TEMA, this comes with different periods which indicates veritable trade signals when they cross each other.
In determining this, when we observe the shorter period TEMA crossing over the longer period, we are definitely anticipating an uptrend in price direction. In this scenario, the shorter period settings would be placed at 30 whereas the longer period settings at 65. Therefore we should be expecting to see the 25 TEMA crossing above the 50 TEMA. In a nutshell, if the shorter period TEMA is above the longer period TEMA, the price trend rises.
In a similar scenario, we may also have a situation where the Longer TEMA-65 crosses above the shorter period TEMA 30 or the shorter period TEMA found below the longer period TEMA. In this scenario, we should be anticipating a downtrend of price trend. In a nutshell, if the shorter period TEMA is below the longer period TEMA, the price trend falls.
What are the Trade Entry and Exit criteria using TEMA? Explain with Charts. (Screenshots required).
Making trade entry and exit orders would as well follow the TEMA indicator line crossover when two TEMA are combined.
In a Downtrend Scenario where price trend is observed in the downward direction when we have two TEMAs combined, the indicator line is also observed in the same direction.
This happens when the Longer TEMA-65 crosses above the shorter period TEMA-30.
When this crossover is confirmed, a SELL Set-up is advised. But this should be confirmed after at least two candlestick confirmations.
Stoploss is set at the lowest level of the crossover. Take profit would be at 1:1 Risk Reward ratio or 1:2 ratio.
In an Uptrend Scenario where the price trend is observed in the upward direction when we have two TEMAs combined, the indicator line is also observed in the same direction.
This happens when the shorter period TEMA-30 crosses above the longer period TEMA-65.
When this crossover is confirmed, a BUY Set-up is advised. But this should be confirmed after at least two candlestick confirmations.
Stoploss is set at the lowest level of the crossover. Take profit would be at 1:1 Risk Reward ratio or 1:2 ratio.
Use an indicator of choice in addition to crossovers between two TEMAs to place at least one demo trade and a real margin trade on an exchange (as little as $1 would do). Ideally, buy and sell positions (Apply proper trade management). Use only a 5 - 15 mins time frame. (Screenshots required).
This is a BTC/USDT pair in a 3mins time frame. This is a sell setup given to the signals from the TEMA indicator and the RSI indicator.
The longer period TEMA-65 was observed above the shorter period TEMA-30 which invariably shows a downtrend of asset Price. The RSI indicator was in concurrence with this bear trend which confirms the position of a sell setup.
Sell entry -43,869
Stoploss - 44,139
Take profit - 43,500
As of the time of this report, the opened position has generated a profit of +23.04USD**.
What are the advantages and disadvantages of TEMA?
Disadvantages of the TEMA
During market volatility or choppy moments, the TEMA tends to provide little signals which hence provides false signals.
We noticed that the TEMA reduces lag to its minimum, this doesn't go well for some investors who prefer a lagging indicator so as to keep track of more significant market effects.
Due to the concept behind TEMA, it seems to react faster than the SMA relative to price changes, this makes it difficult to sometimes ignore insignificant effects since it would react to every market push.
Advantages of the TEMA
- It is a trend-based technical indicator that was developed to smother the price value and other market noises.
- TEMA concept ensures that it eliminates lagging to its minimal level.
- it is calculated by using three (3) EMAs as well as substracting lags which makes signals a lot more reliable.
- It determines trend direction as well act as dynamic support and resistance level for trade positions.
Conclusion
Despite the observed limitations in the use of this indicator (TEMA) due to some of notable investors preferences, the TEMA indicator still offers arrays of opportunities to the majority of the investors by providing exit/entry trade positions for traders, providers resistance, and support levels which are guide before, during after trade positions as well as crossover signals. In its calculation, it has to remove lags to their minimum level.
Thank you professor @fredquantum for your lessons.
All images used are from the tradingview site.