Technical Analysis Averages Part 3

TEMA Average

The TEMA average is generally not used directly on a chart. This average is however used in many formulas to smooth longer periods of data with only a small amount of lag.

The TEMA, or Triple Exponential Moving Average, was introduced by Patrick Mulloy in Technical Analysis of Stocks & Commodities magazine, February 1994.

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TEMA is not simply a triple exponential moving average, as you probably would assume from the name. The intention of TEMA is to limit the typical lag of an average.
An ‘n’ day exponential average (EMA) has a smoothing factor alpha of:  

and a delay of 

.

The larger the average period n, the better the smoothing, but, unfortunately, the larger the delay. TEMA uses a technique of John Wilder Tukey to compensate the delay. The data is sent several times through the same filter and combined afterward:

TEMA = (3*EMA – 3*EMA(EMA)) + EMA(EMA(EMA))

The application of the TEMA average makes most sense if we want to smooth larger data periods, whereas the delay must remain as small as possible.

Figure 4.37: TEMA average.

Compare in figure 4.37 the 50-day TEMA average with the 20-day exponential average. You can see that the much longer TEMA average is at least as fast at the reversal points as the exponential average.

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