The Triple Exponential Moving Average (EMA) indicator was created to make it easier for traders to determine strength or weakness without the traditional lag associated with regular moving averages (MAs). In order to accomplish this, the Triple EMA takes multiple EMAs of the original EMA and then subtracts lag from the result.
The Triple EMA indicator can be calculated with the following formula:
Triple EMA = (3 x EMA1) − (3 x EMA2) + EMA3
EMA1 = Original EMA
EMA2 = EMA of EMA1
EMA3 = EMA of EMA2
The formula for the Triple EMA, depicted and explained in detail above in the Calculations section, is used to subtract lag and provide a smoother evaluation of short-term price direction and trend. It is important to note that when the price is projected above the Triple EMA, it helps confirm a price uptrend, whereas the price is below the Triple EMA, it helps confirm a price downtrend. In addition, when price crosses down through the Triple EMA indicator, this could be a sign that price is pulling back or hinting to a reversal to the downside.
The Triple EMA differs from traditional EMAs and MAs because it reacts quicker to price changes and is able to subtract lag with its calculated formula. Contrary to this, the Triple EMA indicator can also be used in similar ways to traditional EMAs and MAs. Perhaps most notably, the direction of Triple EMA indicates short-term price direction and overall trend. When the line slopes up, it means that price is also moving up. When it slopes down, you guessed it, price is also moving down. Lag is not completely eliminated from the indicator’s results, however, so it is important that traders understand that when prices change quickly, the indicator may not be able to track those changes straight away. Additionally, if a trader is working with a larger lookback period, the Triple EMA indicator will most likely be slower in its ability to track the direction and trend of price changes.
The Triple EMA can also provide support or resistance for price and is highly reliant on the asset’s lookback period. For instance, if the price is generally rising, it may drop to the Triple EMA on pullbacks, making the price appear to bounce off of the indicator and then continue to rise. If this occurs when using the Triple EMA, the indicator should have provided support and resistance previously. If it did not provide support and resistance in the past, it may be safe to conclude that it therefore will not provide it in the future.
In addition, many traders often use the Triple EMA indicator line as a substitute for price. The single line of the indicator often filters out a lot of the noise that is traditional for candlestick, bar charts, or even line charts.
Although the Triple EMA is known by many traders as a great indicator for reducing lag, it still has its faults as is true for any other indicator. MAs, for example, are very useful for trending markets, when price direction is particularly strong. When trends are choppy and price direction is weak, MAs, and the Triple EMA as well, may generate false signals as price fluctuates and the direction is in flux.
It is also true that although reducing lag is helpful to some traders, others resent the indicator’s ability to subtract it from the calculation. Some traders actually prefer their indicators to lag because they don’t want their tools reacting to every single price change or small movement. The Triple EMA oftens reacts quicker than most MAs and EMAs and tracks price more closely than SMAs, but this also can mean that the price may cross the Triple EMA on a smaller price move than what is usually required for the same move to cross the SMA. This can shake traders out of positions, and for investors who don’t want to actively trade, it could prove more trouble than it is worth if there isn’t a significant trend change.
The Triple Exponential Moving Average reduces lag, smooths price fluctuations, and is an alternative to other moving averages because of its different calculation. The Triple EMA is shown as a single line. Its calculation takes multiple EMAs of the original EMA and then subtracts lag from the result.