What is Triple Exponential Moving Average: To analyse market trends, one should be comfortable with technical analysis tools to make informed decisions about the price movement of securities.
Here, we shall break down the technical analysis with a popular indicator called Triple EMA(Exponential Moving Average). It is derived from the traditional EMA(Exponential Moving Average) to reduce lag and provide more accurate views on trends, reversals, support and resistance of the Stocks.
We shall go into detail on what is Triple exponential moving average indicator and technical analysis and discuss how to calculate its value. And also discuss in detail how it can be employed as a trading strategy to find better entry or exit signals of security.
What is Triple Exponential Moving Average Indicator(TEMA)?
The Triple EMA is a technical analysis indicator used to identify trends easily by smoothing price fluctuations and eliminating the lag associated with trading sessions.
The Triple Exponential Moving Average(TEMA) is a type of moving average based on multiple EMA calculations. It helps to identify trend direction, price reversals and support or resistance levels.
Moving averages are calculated as an average of the past closing price of the security over a specific period. The exponential moving averages(EMA) are calculated by giving more weightage to the recent closing price of the security.
When the price of the security is above the Triple EMA it is an uptrend, and when the price of a security is below the Triple EMA then it is a downtrend.
How to calculate Triple EMA?
The formula to calculate Triple EMA(Exponential Moving Average) is:-
TEMA= (3 x EMA1)-(3xEMA2)+EMA3
- TEMA is Triple Exponential Moving Average
- EMA1 is Exponential Moving Average(EMA)
- EMA2 = EMA(EMA1)
- EMA3 = EMA(EMA2)
To calculate TEMA the period of the indicator should be decided. For example, consider 9day periods
- EMA for a 9-day period is calculated, which is EMA1.
- Now EMA2 is calculated for the same 9-day period as, the EMA of EMA1.
- For EMA3, calculate the EMA of EMA2 for the same period as before.
Place the calculated EMA1, EMA2, and EMA3 in the above formula for TEMA.
Triple Exponential Moving Average Trading Strategies
We shall discuss various strategies of the TEMA indicator to help traders identify the price momentum of security.
Identifying market trends is very crucial for a trader to go long or short on security, so the Triple EMA indicator helps to spot trends easily.
When the price of a security is trading above the Triple EMA indicator, it is said to be an uptrend with bullish momentum.
If the price of a security is trading below the Triple EMA indicator, it is identified as a downtrend with bearish momentum.
Below is the chart of HDFC Bank showing the trend direction with the Triple EMA indicator.
The signals identified are based on the period set for the Triple EMA indicator, it can be adjusted to any of the periods based on traders’ views and strategies to identify opportunities in the security.
As we have learnt trend directions with the Triple EMA indicator, it also helps to identify the trend reversals of the security.
If a security trading above the TEMA(Triple Exponential Moving Average) indicator reverses and breaks below the indicator, it is considered a trend reversal from uptrend to downtrend.
And when a security trading below the TEMA(Triple Exponential Moving Average) indicator reverses and breaks above the indicator, it is considered a trend reversal from a downtrend to an uptrend.
Traders can also benefit from the above trend reversals to identify better entry/exit signals of security.
Support and Resistance
The Triple Exponential Moving Average(TEMA) help traders spot support and resistance for security.
When the price of a security is trading above the TEMA, the pullback is supported by the indicator. Hence, the Triple EMA acts as a support line for the security to scale in an uptrend.
Below is a chart of BankNifty showing the TEMA indicator acting as a support to move upwards.
In a downtrend market, the price of the security will trade below the TEMA, the TEMA acts as a resistance line to the security as the price retests the TEMA it builds more momentum towards a downward trend.
Below is a chart of Wipro Ltd showing resistance acted by the TEMA indicator in a downtrend market.
To make this strategy more reliant choosing a specific period is important based on trader views to have smoothened signals.
Triple EMA Crossover strategy
Another strategy to trade with Triple EMA is the crossover of two TEMAs. Two Triple EMAs of 10-period TEMA as the short period and 50-period as the long period are added to the chart of security.
When the short-term 10-period TEMA crosses above the long-term 50-period TEMA, a buy signal is generated.
A sell signal is considered when the short-term TEMA crosses below the long-term 50-period TEMA.
Below is a chart of NIFTY 50 showing the Triple EMA crossover strategy.
Limitations of Using the TEMA(Triple Exponential Moving Average)
- TEMA is generally useful in trending markets when the price moves in one or the other direction. While in sideways markets, the price becomes rangebound so the TEMA may result in false signals.
- TEMA reacts quickly to the price change, resulting in crossovers for every small price movement, which can impact traders to constantly monitor their positions unless a significant trend change is identified.
- It is a lagging indicator as it depends on historical price data.
- It is useful only for present price movements as it cannot predict future price trends.
Using one type of technical indicator is not better than another, deciding on the technical analysis tool comes down to one’s experience.
Traders should use the Triple EMA indicator in conjunction with other technical analysis tools like indicators, chart patterns, price volume analysis, candlestick patterns, etc to make the best entry or exit opportunities in security.
The key points mentioned above give a brief knowledge of Triple EMA indicator technical analysis. Traders with this indicator can analyse the security to read trends, reversal, support and resistance levels.
It is advised to use other technical tools along with one indicator to spot the best profitable trades.TEMA based on multiple EMA calculations reducing lag time provides a valuable and accurate guide for market participants to manage the positions with better risk-to-reward ratios.
Written by Deepak M
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