Triple Exponential Moving Average - TEMA

See: Triple Exponential Average - TRIX.

A stock starts the week at $15 a share. On Tuesday, it rises to $15.50. It drops on Wednesday to $14.75. Thursday sees a rally to $16, only for shares to drop again on Friday to $15.10. Lots of movement...but movement that didn't actually take the price anywhere. It ended the week basically where it started.

A moving average is meant to strip out some of this meaningless price movement.

You're looking at a 50-day moving average. It takes the average price for the previous 50 days of trading. The next day, it does the average again...but of course, we've moved forward in time a day, so the data set changes by a single day. And so on. Each day, the data set updates by one day, taking a continual average of the 50 prior days. Then all those points (each day's average of the previous 50 days) are connected to make a line. That line represents the 50-day moving average.

The moving average is useful in tracking longer-term trends. Because it smooths out some of the day-to-day bouncing around, it better shows the true direction the stock has taken. However, there's a problem. The process that creates the moving average involves a lag. It's looking 50 days in the rearview.

The triple exponential moving average looks to fix that problem. It aims to accomplish the same basic goal (i.e. removing some of the near-term fluctuations in the stock to focus on the longer-term trend), but it eliminates the lag inherent in run-of-the-mill moving averages.

The math behind a TEMA is complex; it's enough to know that the TEMA provides a longer-term trend line. You can read prices in relation to the line; if a stock dips below the line, it might signal a move into a downturn. Conversely, a move above might signal an upswing.