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Why Including a Triple Exponential Moving Average (TEMA) In Your MT4’s Trading Toolkit?

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Introduction

TEMA A.K.A Triple Exponential Moving Average is a technical indicator created by Patrick Mulloy in 1994. This indicator is designed to smooth the price fluctuations, to simplify the identification of a trend without any lag associated with the simple moving average.

TEMA is a leading indicator because it reacts to the price changes faster than the simple and exponential moving averages. In the calculation of the TEMA indicator, the lag has been subtracted, which makes it smoother to price action. Traders use TEMA just like any other moving averages. That is, when the TEMA’s slope is positive, the market is in an uptrend, and when it is negative, it means that the price is dropping down.

In a volatile market, sometimes the TEMA indicator shows some lag, because it may not change its angle immediately. If you use a larger period, when price action changes its direction, then it could take more time to change its angle. TEMA is not a standalone indicator, so it must be paired with other indicators to identify the signals.

The TEMA indicator acts as support and resistance levels as well. For example, in an uptrend, when the pullback begins, one can expect the price to drop to the TEMA. To determine if the market will hold at the TEMA, you will have to find the period where the TEMA has already provided support and resistance in the past. And, if the indicator hasn’t provided any support and resistance in the past, then it probably won’t hold in the future.

Below is an example where the indicator is applied to the USDJPY currency pair.

TEMA Indicator Calculation

The Triple Exponential Moving Average (TEMA) of time series ‘t’ is given by

* EMA1 = EMA (t,period)

* EMA2 = EMA (EMA1,period)

* EMA3 = EMA (EMA2,period))

* TEMA = 3*EMA1 – 3*EMA2 + EMA3

Installing the TEMA indicator (Step-by-step)

By default, the TEMA is not available in the MT4 Terminal, but it is available on the internet. Follow the link below to download the indicator.

Download the zip file from the above link, extract the file and then navigate to the MT4 directory/MQL4.

Open the ‘Indicators’ folder and paste the extracted file there.

Restart the MT4 Terminal.

To apply the indicator on the MT4 main screen, follow the below step sequence.

Insert > Indicator > Custom > TEMA Indicator

You can see in the image below we apply the indicator on the EURAUD chart.

TEMA Indicator – Trading Strategies

TEMA + Detrended Indicator

In this strategy, we paired the TEMA indicator with the Detrended indicator to identify the trading signals.

Detrended Oscillator measures the difference between the past price and the moving average. The DPO indicator is based on a displaced moving average, which oscillates above and below the zero-line. The DPO is considered positive when it goes above the zero-line, and negative when it goes below the zero-line.

In this strategy, we shall be using the default settings for the Detrended indicator and 100 periods for the TEMA indicator.

According to this strategy, when the TEMA goes below the price action, and the Detrended gives us a sharp reversal at below the zero-line, it indicates a buy signal.

As you can see in the image below of the NZDCHF forex pair, when the TEMA goes below the price action, and the DPO also gives a reversal at the oversold area, it indicates a buy trade in the market. And, if we were in the buy, we would have made about 140 pips from the trade.

Since we’re using a larger TEMA period, it is recommended use this strategy only on higher timeframes such as 60 minute, 240mins, daily, and so on.

The 100-period TEMA often generates fewer signals. But, when it identifies a signal, it works like a charm. We have a proven track record that, 8 out of 10 times this strategy works very well in a trending market.

Sell Example

The strategy is when the DPO indicator sharply reverses below the zero-line, and TEMA indicator also goes above the price action. When this happens, it indicates a sell signal.

As you can see in the image below of the USDJPY 60 minute forex chart, the market was in a downtrend; and during the pullback phase, when the TEMA goes above the price action, and DPO indicator also gives a sharp reversal at the overbought area, it indicates a short signal.

If the trend is super strong, then always put the stop loss at the recent high. And if the DPO indicator gives reversal at the oversold area, then you can aim for a brand new lower low.

If you’re a novice trader, then always go with the trend. Later, once you gain some experience, then use this strategy to take countertrend trades as well.

TEMA + Percentage Price Oscillator

In this strategy, we paired the TEMA indicator with the Percentage Price Oscillator.

The Percentage Price Oscillator is a momentum indicator. It consists of a centerline, a histogram and a signal line. The PPO measures the difference between the two moving averages as a percentage of the larger moving average. It spots divergences in the market, identifies the centerline crossovers, and hence, gives buy/sell signals. It also helps in confirming the trend direction. Just like the MACD indicator, the PPO also reflects the convergence and divergence of the two moving averages.

The strategy is when the TEMA goes below the price action, and the crossover happens on the PPO indicator at an oversold area. This indicates that the market is showing some bullishness. So, when this setup appears, we can prepare to go long.

In the below chart, the prices were in a downtrend in the beginning. Later, when the TEMA goes below the price action, a sharp reversal happens on the chart, and the crossover happens on the PPO indicator at an oversold area, it indicates a buy signal. And we can see that, immediately after the buy signal, the market reverses its trend and starts making higher highs.

Close your trades when TEMA indicator goes above the price action or if there’s any strong resistance area.

This strategy works well on all the timeframes, irrespective of the type of trader you are.

Sell Example

For a sell, do the opposite of what is explained in the above strategy. That is, when the TEMA goes above the price action, and PPO indicator gives us the crossover at the overbought area, you can prepare to go short.

In the below EURCHF currency pair, the market is in a pullback (buy) mode. When the TEMA goes above the price action market, and the crossover happens on the PPO indicator, it indicates a reversal in the market.

When the TEMA goes below the price action, you can consider closing the trade. Here, the TEMA stays above the price action for an extended period, which is a clear indication that you must be holding the trade for the longer term.

Bottom line

TEMA is the short form for Triple Exponential Moving Average. This indicator is a custom setup, which is the reason it is not available on some of the platforms. However, one can download it from the internet.

A bullish signal is generated when the price goes above the TEMA, and a bearish signal is indicated when the price goes below the indicator.

In this article, we have shared our proven strategies, which work on all the market conditions. However, we suggest you use these strategies on a demo account initially and then apply it on to a real account.

Also, we believe that you’ve understood the Triple Exponential Moving Average indicator thoroughly. So, use this fantastic indicator to maximise your profits. All the best!