A moving average is one of the most commonly used indicators. It is indeed helpful in technical analysis however, it is characterised by some lag. Is it possible to smooth the fluctuations of the price and reduce the delay? Let’s see how the Triple (TEMA) and Double (DEMA) Exponential Moving Averages are coping with it.
The Triple Exponential Moving Average on the Binomo platform
The Triple Exponential Moving Average works as other MAs so that it will be helpful in identifying the direction of the trend, recognising the support and resistance levels and catching short-term changes in the trend or pullbacks. The difference is that it subtracts some of the lag from the multiple exponential moving averages. Thanks to that, it responds faster to the changes in the price.
Naturally, there is still some delay in the readings and the larger period you will take into calculations, the slower reaction of the TEMA line.
Identifying the trend direction with the TEMA
It is possible to define the direction of the trend with the Triple Exponential Moving Average. It is enough to look at the indicator in relation to the price. The upward movement can be identified when the price bars are developing above the indicator’s line. There is a downtrend in the market when the price can be seen below TEMA’s line.
Likewise, we can detect the changes in the trend direction. When the price was above the TEMA and now it moves below it, we can assume the uptrend is going to an end or at least the pullback phase takes place. When the price was seen below the TEMA and now it crosses above it, we can expect the trend will reverse soon or again, the pullback phase occurs.
Using the support and resistance levels with the TEMA
The Triple Exponential Moving Average may be also used to define the support or resistance levels. Make sure that the indicator has provided support or resistance in the past. Only then you can expect it will happen again.
When the price is in the overall uptrend, it may drop during the pullback phase to the support offered by our indicator. Then it will bounce off and move upwards again. Similarly, during the downtrend, the price may rise up to the TEMA level which will work as the resistance here, and then bounce off and keep falling.
Double Exponential Moving Average (DEMA)
The Double Exponential Moving Average is also designed to minimise lag in the indicator’s displays. It is calculated in a different way so the information given by it will be slightly different too. The EMA of price is multiplied by two and then the EMA is subtracted from the original EMA.
Generally speaking, the DEMA reduces lag less than the Triple Exponential Moving Average.
The Double and the Triple Exponential Moving Averages were created to smooth the fluctuations of the price. They show less lag than other moving averages. Still, you should decide what you are looking for. Some traders favour some amount of delay as they do not want indicators to react to every change of the price. The TEMA responds faster to the changes in the prices and so it follows the price more near. The crosses of the price with the TEMA will occur more often than when using a Simple Moving Average, for example. For those who are waiting only for significant changes in the trends, it would be a disadvantage.
Remember also, that moving averages, and the TEMA is no different here, serve best in the trending markets. When the price is in the ranging phase they are not of great help and may result in false signals.
Use the TEMA together with other analysis methods such as other indicators or price action.
There are many types of moving averages available on the Binomo platform. You should make your own decision about which one will be best for your strategy.
Make use of the Binomo demo account. In a risk-free environment, you may practice trading with different moving averages. Observe how the DEMA and TEMA behave on the price chart. Open some trading positions and see how you perform.
Wish you good luck!