What is the TEMA Indicator?
To avoid the lag associated with traditional moving averages (MA), the triple exponential moving average (TEMA) was developed. The indicator also smooths price fluctuations by taking multiple exponential moving averages (EMA) of the original EMA and subtracting some of the lag that comes with it.
Understanding the TEMA Indicator
Similar to other moving averages, the TEMA can identify trend directions, provide signals for possible short-term trend challenges or pullbacks, and produce support or resistance. Due to some of the lag being subtracted out when calculating the TEMA, the indicator reacts quicker to price changes than a moving average or exponential moving average. The indicator may be used the same as other moving averages are used. The direction in which the TEMA is angled is what indicates the short-term (averaged) price direction. If the line is sloping upwards, that equals an increase in price movements, and on the other hand, a downward slope equals a decrease in price movement.
As the TEMA calculation does not subtract all of the lag attached to the EMA’s, the indicator does not immediately react to fast-changing price movements. In addition to this, there is also a delay in the indicator when using a more significant lookback period.
Trend Direction
The indicators location relative to the currency pairs price is able to provide indications of the direction of the trend. When a currency’s price is above the TEMA indicator, that is considered a confirmation of the price increasing for that lookback period, and vice versa if the price is below the TEMA indicator. It is therefore essential to select a lookback period that holds true most of the time. With that being said, as a trader, you should choose the correct lookback period that best suits the currency pair you are trading if you plan on using the indicator to identify the pairs trends.
Aside from identifying trend directions, the TEMA can also place any trend changes when a currency’s price moves through the TEMA. If the price is above the average and then drops below, that could indicate a reversal of the uptrend or that the price is entering a pullback phase. Instead, if the price is below the average, it then moves above it, indicating the price rallying. When using the TEMA indicator, these types of crossover signals can help in choosing whether to enter or exit positions.
Support & Resistance
It is also possible for the TEMA to provide support or resistance for a currency’s price. This is possible when overall the price is rising; on pullbacks, it can drop to the TEMA and then the price could bounce off of it and keep climbing. An important note to remember is that these movements are dependent upon using the proper lookback period of the currency pair. You also need to ensure that if you use the TEMA for this purpose, it has shown support and resistance in the past. Otherwise, it cannot be used to provide support and resistance for future purposes.