What is the Triple Exponential Moving Average - TEMA
The triple exponential moving average, or TEMA, was developed by Patrick Mulloy in 1994 to filter out volatility from conventional moving averages. While the name implies that it's a triple exponential smoothing, it's actually a composite of a single exponential moving average, a double exponential moving average, and a triple exponential moving average.
BREAKING DOWN Triple Exponential Moving Average - TEMA
The triple exponential moving average was designed to smooth price fluctuations and filter out volatility, thereby making it easier to identify trends without the lag associated with moving averages. Many traders find it to be a useful tool in identifying strong, long-lasting trends, but it may be of limited use in range-bound markets with short term fluctuations.
The formula for calculating the triple exponential moving average is:
TEMA = 3 * EMA - 3 * EMA(EMA) + EMA(EMA(EMA))
The TEMA requires more periods for its calculation than the traditional EMA due to the EMA(EMA(EMA)) calculation.
Most traders use the triple exponential moving average in conjunction with other technical indicators to maximize the odds of a successful trade. For example, they may look for a short-term breakout from a 26-period TEMA, but confirm the move by looking at volume. They may also look at the slope of the TEMA to determine the direction of a trade before identifying specific entry and exit points.
Traders may even use the TEMA as a substitute for stock prices when looking for opportunities. For example, a trader may look at only the TEMA for a breakout from prior highs rather than looking at the price at all. By eliminating the daily noise, traders can improve their decision making process and avoid the potential for whipsaw movements that have no bearing on long-term trends.
Finally, long-term investors may similarly use the TEMA to see where a price is trending over the intermediate term, while still avoiding the lag associated with most moving averages and the volatility associated with looking at actual prices.
Triple Expontential Moving Average Example
Let's take a look at an example of a triple exponential moving average applied to a SPDR S&P 500 ETF (SPY) chart:
In the above example, it is evident that the triple exponential moving average has much less lag than a traditional 26-period exponential moving average, but still smooths out volatility. Traders might use this moving average to show where a security is trending at a glance, while algorithmic traders may appreciate the indicator when calculating trading signals.