The triple exponential moving average (TEMA) is important for traders and analysts because it is useful as a trend indicator. It reduces the effects of minor price fluctuations and helps to filter out volatility.
The triple exponential moving average is a modified moving average that was created in the mid-1990s by Patrick Mulloy. This average was developed to avoid the inevitable issue of lag that traders encounter when using oscillators or exponential moving averages (EMAs). Using multiple moving averages of price smooths out short-term fluctuations. What makes the TEMA so effective is that it uses successive EMAs of EMAs, and the formula includes an adjustment for lagging.
The TEMA serves as a trend indicator. It is not as successfully employed in a ranging market. The TEMA is most easily used for trading purposes with trends sustained over long periods of time. With longer trends, analysts can more easily filter out and disregard periods of volatility. Using the TEMA with a variety of other oscillators or technical indicators can help traders and analysts to interpret sharp price fluctuations and evaluate volatility. Some analysts recommend a combination of the moving average convergence divergence (MACD) and the TEMA for evaluating market trends.
To calculate the TEMA, once an analyst has chosen a time period, he calculates the initial EMA. Then, a second EMA, the double exponential moving average (DEMA), is calculated from the initial EMA. The final step in calculating the TEMA is to take a third EMA from the DEMA.