How to Day Trade with the

Triple Exponential Moving

Average (TEMA)

TEMA Definition
TEMA stands for Triple Exponential Moving Average and is used
to identify trends in the market. It was developed by
Patrick Mulloy and was first published in the 1994 issue of
Technical Analysis of Stocks and Commodities. Mulloy
discovered that by developing a unique composite of a simple
exponential moving average, double exponential moving average
and a triple exponential moving average, he could reduce the
amount of lag between the indicator and price action. The
TEMA is a custom indicator and is not included in many trading
platforms.

Trading with the Triple Exponential

Moving Average
Mulloy discovered that by modifying the MACD to with a TEMA
input, it produced better results than the standard MACD,
which is based on the exponential moving average.

Triple Exponential Moving Average

Formula
Below is the formula for the triple exponential moving
average:

(3 * EMA) – (3 * EMA of EMA) + EMA of EMA of EMA)

Where:
EMA = n-day exponential moving average

TEMA

Above is a 5-minute chart which includes a 50-period TEMA and

a 50-period SMA.

The green line is the triple EMA and the blue line is the
simple moving average. Notice that the two indicators include
the same number of periods, but you can see the difference in
their plots.

Triple Exponential Moving Average

Signals
As you probably guess, the basic signal of the TEMA trading
indicator is the same as with any other moving average – the
price crossover. When the price breaks the triple exponential
moving average, we get an entry or exit signal in the
respective direction.

Bearish Cross
We have a bearish TEMA cross when the price closes below the
indicator.

If the price breaks the triple exponential moving average in a

bearish direction, we get a short signal. This means that any
open long trade should be closed. At the same time, short
trades should be considered.

Bearish TEMA Cross

As you see in the above image, the price closes below our
triple exponential line. This creates the short signal on the
chart.

Bullish Cross
Bullish TEMA Cross

As you see, after the bullish TEMA crossover, the price starts
a new increase in the direction of the cross.

TEMA Crosses

Now you are looking at a 2-minute chart of Ford Motor company.

The green line is a 50-period triple EMA where we localize 4
trading signals.

The first signal comes with the first green circle when the
price closes a candle above the triple exponential moving
average.
The second signal comes after a price correction, which leads
to a steady decline. As you see on the chart, there is a big
bearish candle, which closes below the TEMA.

At the end of the bearish trend, the price begins to hesitate

and then closes above the triple exponential moving average.

Do you have a handle on this yet?

I don’t want to paint this perfect picture, as there are a ton

of false signals produced by the market.

For this reason, we will now discuss how to distinguish real

TEMA signals from false ones.

Triple Exponential Moving Average

Strategy
Now that you are familiar with the TEMA signals, we will
discuss a few trading strategies.

A key tenet of the trading strategy is the use of additional

trading indicators to filter out false signals.

Triple Exponential Moving Average +

Volume Indicator
This is a classical setup where we combine the TEMA trading
instrument with a good ole volume indicator.

The idea of this strategy is to take signals that include high

trading volumes.

As you probably know, the market is trending when volumes are

high.

During low volumes, prices are likely to range and not trend.
This means that low volumes are the major cause for the
sideways price action.

For this reason, triple exponential moving average signals,

which appear during lower trading volumes tend to fail.

For this strategy, we will enter the market only when TEMA
price crossovers with higher trading volumes.

We will then hold our trades until the price action breaks the
triple exponential moving average in the opposite direction.

TEMA + Volume

Above is the 2-minute chart of General Motors from Apr 26,

2016. The green line on the chart is the 50-period triple EMA.
The red and green bars at the bottom of the chart are our
volume indicator.

The chart starts with a range consisting of light volume.

Notice that for the crosses beneath and above the TEMA, we
ignore these signals, due to the light volume.

Suddenly, volumes in GM begin to increase and the price forms

a bigger bullish candle.

At the same time, the price begins to move above the triple
exponential moving average and the bullish candle imply that
this trend is likely to be bullish. Therefore, we open a
bullish trade with the closing of the bullish candle as shown
on the image.

The price continues higher after opening the position.

The first correction of the bullish move tests the area of the
50-period TEMA but the price is able to hold up under the
selling pressure.

The second correction actually breaches the TEMA, but the

price was unable to close beneath the TEMA.

Therefore, this signal should be disregarded. GM then makes

one final push higher and ultimately closes beneath the TEMA.

Once the price closes beneath the TEMA, we would need to exit
the position.

TEMA + Volume Weighted Moving

Average (VWMA)
The VWMA acts as a standard moving average on the chart. The
difference between the VWMA and the simple moving average is
that the VWMA places emphasize periods with higher trading
volume. This makes it the perfect tool to combine with the
TEMA.

We will use the same 50-period TEMA in a combination with a

25-period VWMA (TEMA/2). We will open trades only when the
TEMA and the VWMA cross. The trades should be in the direction
of the crossover. We will hold each trade until the price
action breaks the volume weighted MA in the opposite
direction.
TEMA + VWMA

Above is the 2-minute chart of General Electric from Apr 27,

2016.

The green line on the graph is the 50-period TEMA. The blue
line is the 25-period VWMA. The image illustrates a long trade
with the GE stock, taken by signals from the TEMA and the
VWMA.

The chart above starts with a price increase and a bullish

crossover between the two indicators. This generates a long
signal between the triple EMA and the volume weighted MA.
Following our strategy, we open a long position.

The correction which comes after the second price impulse

brings the price below the triple exponential moving average.

However, the VWMA is still untouched. Following our strategy’s

exit rules, we hold the trade until the price closes a candle
below the VWMA.

Notice, in this case, the TEMA fails to provide a reliable

exit signal. The VWMA, on the other hand, contains the price
in a better way than the TEMA. The reason for this is that the
VWMA indicator is a volume-based moving average. In this
manner, the indicator gains additional inclination when
volumes are higher.
This is how the VWMA indicator adapts to the dynamic moves on
the chart.

The next price action leads to a new increase and the GE stock
reaches the highest point of its bullish trend.

The stock then enters a corrective phase. On the way down,

General Electric breaks the triple exponential moving average
line.

Even though we had a break, we stay until we see a breakout in

the volume weighted line. This happens 16 minutes later when a
bigger bearish candle appears on the chart. We get a valid
exit signal and we close our long trade on the GE stock.

Which is the Best Triple

Exponential Moving Average Strategy
I believe this would be the second strategy – TEMA + VWMA. The
reason for this is that the VWMA gives all the additional data
we need to enter a trade. This is average price and volumes
reaction.

The TEMA plus the volume indicator is another strategy for

trading with TEMA; however, the entry signals are sometimes
hard to determine. The reason for this is that in many cases,
volumes might be confusing. If the volume bar is somewhere in
the middle, is the trading volume low, or high? This sometimes
confuses and fails the traders who attempt to enter a
position.

Conclusion
1. The Triple Exponential Moving Average was developed by
Patrick Mulloy.
2. TEMA helps you identify trends.
3. The TEMA is a triple smoothed exponential moving
 average, which reduces the lag between the indicator and
the price action.
4. TEMA is a custom setup, which is missing in many trading
platforms.
5. The basic TEMA signals are:

Bullish Crossover: A candle is closed from the upper

side of the TEMA line
Bearish Crossover: A candle is closed from the lower
side of the TEMA line

6. Two of the best TEMA trading strategies are:

TEMA + Volume Indicator: We enter trades on TEMA

crossover + higher volumes. We exit trades when price
breaks TEMA in the opposite direction.
TEMA + VWMA: We enter trades on TEMA and VWMA crossovers
in the direction of the cross. We exit trades when price
breaks the VWMA in the opposite direction.