In the world of technical analysis, the moving average is without a doubt one of the most popular terms and a very powerful and effective indicator that is very common when it comes to technical analysis and for trading. As such, different variations of the moving average indicator has been developed for specific purposes and solve certain problems to get better results.
Triple Exponential Moving Average (TEMA) is one of the types of moving average indicator that was created in 1994 by Patrick Mulloy. The Triple Exponential Moving Average smooths out price fluctuations most especially in the short term. One of the main drawbacks of the regular moving average is lag and the Triple Exponential Moving Average solves this by making use of multiple EMAs of the original EMA and removing the lag, thereby making it easier to spot trends in the market without the issue of lag.
The Triple Exponential Moving Average utilizes a smoothing function to eliminate noise caused by sharp volatility in in the market and also lag that is common in the regular moving average indicator. With this, it is easier to identify support and resistance levels on the chart and also any clear trend in the market. When the price is above the triple exponential moving average line, it is an indication that the price is bullish, and when the price is below the triple exponential moving average line, it is an indication that the price is bearish. Because of the benefits of the Triple Exponential Moving Average indicator, a lot of traders look out for crossovers and make use of it to identify buy and sell signals.
How TEMA Indicator is calculated
TEMA calculation
Triple EMA = (3 x EMA 1) - (3 x EMA 2) + (EMA 3)
Where;
Exponential Moving Average = EMA
Exponential Moving Average = EMA 1
Exponential Moving Average of EMA1 = EMA 2
Exponential Moving Average of EMA2 = EMA 3
When calculating TEMA, each of the EMAs that is used are set to the same period for better accuracy and consistency in the data and results.
Comparing TEMA with other Moving Averages
Comparisons
TEMA makes use of three MA values in its calculation to obtain the average price. While SMA makes use of simple mean in its calculation to obtain the average price. While EMA puts more weight on the current price in its calculation to obtain the average price.
TEMA is more sensitive to price changes than both the SMA and EMA.
TEMA subtracts the lagging factor, making it an effective trend based indicator compared to the SMA and EMA which are lagging.
The signal of the TEMA is smoother and more accurate compared to the SMA and EMA.
