Crypto Trading Strategy with Triple Exponential Moving Average (TEMA) indicator - Crypto Academy / S6W2 - Homework Post for @fredquantum

Question 1- What is your understanding of Triple Exponential Moving Average (TEMA)?

In the world of technical analysis, the moving average is without a doubt one of the most popular terms and a very powerful and effective indicator that is very common when it comes to technical analysis and for trading. As such, different variations of the moving average indicator has been developed for specific purposes and solve certain problems to get better results.

Triple Exponential Moving Average (TEMA) is one of the types of moving average indicator that was created in 1994 by Patrick Mulloy. The Triple Exponential Moving Average smooths out price fluctuations most especially in the short term. One of the main drawbacks of the regular moving average is lag and the Triple Exponential Moving Average solves this by making use of multiple EMAs of the original EMA and removing the lag, thereby making it easier to spot trends in the market without the issue of lag.

The Triple Exponential Moving Average utilizes a smoothing function to eliminate noise caused by sharp volatility in in the market and also lag that is common in the regular moving average indicator. With this, it is easier to identify support and resistance levels on the chart and also any clear trend in the market. When the price is above the triple exponential moving average line, it is an indication that the price is bullish, and when the price is below the triple exponential moving average line, it is an indication that the price is bearish. Because of the benefits of the Triple Exponential Moving Average indicator, a lot of traders look out for crossovers and make use of it to identify buy and sell signals.

Question 2 – How is TEMA calculated? Add TEMA to the crypto chart and explain its settings. (Screenshots required)

TEMA calculation

Triple EMA = (3 x EMA 1) - (3 x EMA 2) + (EMA 3)

Where;
Exponential Moving Average = EMA
Exponential Moving Average = EMA 1
Exponential Moving Average of EMA1 = EMA 2
Exponential Moving Average of EMA2 = EMA 3

When calculating TEMA, each of the EMAs that is used are set to the same period for better accuracy and consistency in the data and results.

Adding TEMA indicator on a chart

To do add the TEMA indicator on the chart, I opened the tradingview website at https://www.tradingview.com. Clicked on the indicator icon at the top of the interface

_{All Screenshots from my tradingview}

On the search input, I entered the name "TEMA" in the search box. Tradingview will bring up all the available indicators with a similar name. I selected the first indicator with the name "Triple EMA"

Next, I clicked on it to load it on the AAVE/USDT chart

The TEMA indicator has been added to the chart

In the TEMA indicator area, click on the settings icon to view the settings

In the settings tab, there are three main category; input, styles and visibility.

Input - Like every other moving average indicator, the TEMA indicator has only one input, which is the period length, which can be changed to suit your needs. The default period length input for TEMA is 9.

Styles - On the styles tab, the colour of the TEMA line, shape and line thickness of the TEMA line can be changed based on visual preference.

Visibility - On the visibility tab, different elements can be toggled on or off based on the needs. However, all elements are toggled on by default.

The Triple Exponential Moving Average comes with a default period length of 9. However, the period length can be changed depending on the timeframe analysis. Shorter period length is great for smaller timeframe and short term analysis, and longer period length is more suitable for larger timeframe and long term analysis. For instance, when performing longer term analysis, period length of 50, 200 etc are all great periods for more reliable signals and smoother lines.

Question 3 - Compare TEMA with other Moving Averages. You can use one or two Moving Averages for in-depth comparison with TEMA.

Comparisons

• TEMA makes use of three MA values in its calculation to obtain the average price. While SMA makes use of simple mean in its calculation to obtain the average price. While EMA puts more weight on the current price in its calculation to obtain the average price.

• TEMA is more sensitive to price changes than both the SMA and EMA.

• TEMA subtracts the lagging factor, making it an effective trend based indicator compared to the SMA and EMA which are lagging.

• The signal of the TEMA is smoother and more accurate compared to the SMA and EMA.

Question 4 - Explain the Trend Identification/Confirmation in both bearish and bullish trends with TEMA (Use separate charts). Explain Support & Resistance with TEMA (On separate charts). (Screenshots required)

The Triple Exponential Moving Average indicator is known to be a trend-based indicator, this makes it a very effective tool for trend identification and trend confirmation.

Bullish Trend

On the BTC/USDT chart using the 200 period TEMA, we can see that in the area where the price was in an uptrend and moving in an upward direction, the price was rising above the rising TEMA line, which is a strong indication of a bullish trend.

Bearish Trend

On the BTC/USDT chart using the 200 period TEMA, we can see that in the area where the price was in a downtrend and moving in a downward direction, the price was falling below the falling TEMA line, which is a strong indication of a bearish trend.

Support with TEMA

Looking at the BTC/USDT chart using the 50 period TEMA, we can see the various support levels on the chart. We all know that support means the ground floor where the price falls to and fails to break below the level before bounces upwards. Using TEMA on the chart, we can see the price is moving in an upward direction and the various levels where the price falls to without being able to break below that level before bouncing upwards. Using the 50 period TEMA, the price pullsback and drops at the TEMA line and continues its uptrend price movement.

Resistance with TEMA

Looking at the BTC/USDT chart using the 50 period TEMA, we can see the various resistance levels on the chart. We all know that resistance means the ceiling or roof top where the price rises to and fails to break above the level before bounces downwards. Using TEMA on the chart, we can see the price is moving in a downward direction and the various levels where the price rises to without being able to break above that level before bouncing downwards. Using the 50 period TEMA, the price returns upwards and hits at the TEMA line and continues its downtrend price movement.

Question 5 - Explain the combination of two TEMAs at different periods and several signals that can be extracted from it. Note: Use another period combination other than the one used in the lecture, explain your choice of the period. (Screenshots required)

When it comes to using any form of moving average indicator most especially the Triple Exponential Moving Average TEMA indicator, crossovers are very useful when it comes to identifying buy and sell signals. Crossovers can either be the bullish crossover which can also be referred to as the golden cross or the bearish crossover which can also be referred to as the death cross.

Bullish crossover (Golden cross) using TEMA

Making use of the 50 TEMA and 200 TEMA we can clearly see the occurrence of the bullish crossover or the golden cross. The smaller period 50 TEMA line crossed above the longer period 200 TEMA line. This bullish crossover or golden cross means that the buyers or the bulls are about to take control of the market. After that, we can see that we can see that an uptrend price movement followed next. For me, the Buy signal was spotted as price couldn’t break below the 50 TEMA line after the crossover. The price was above both the TEMA lines and the 50 TEMA line served as a dynamic support for the price.

Bearish crossover (Death cross) using TEMA for Sell Signal

Making use of the 50 TEMA and 200 TEMA we can clearly see the occurrence of the bearish crossover or the death cross. The smaller period 50 TEMA line crossed below the longer period 200 TEMA line. This bearish crossover means that the sellers or the bears are about to take control of the market. After that, we can see that a downtrend price movement followed next. For me, the Sell signal was spotted as price couldn’t break above the 200 TEMA line after the crossover. The price was below both the TEMA lines and the 200 TEMA line served as the resistance for the price.

Question 6 - What are the Trade Entry and Exit criteria using TEMA? Explain with Charts. (Screenshots required)

When it comes to making use of TEMA, crossovers has proven to be really effective way of identifying buy and sell, entry and exit signals.

For Buy Entry and Exit Criteria

For buy entry and exit, using a combination of two TEMA indicators as different period length is great for identifying trends and direction of the market. A bullish crossover or golden cross is a strong indication that the price is bullish.

For the bullish crossover, the smaller period 50 TEMA line has to cross above the longer period 200 TEMA line and the price has to be above the two TEMA lines. This bullish crossover means that the buyers or the bulls are about to take control of the market.

However, it is important to wait for more candles to form before placing a buy trade. For me, I waited for the at least three green candles to form after the red candle failed to break below the 50 TEMA line.

With this, a buy signal is confirmed and a buy trade can be placed with appropriate risk management strategies like take profit and stoploss.

With a risk:reward ratio of 1:2, take profit and stoploss is set for the buy entry and exit.

For Sell Entry and Exit Criteria

For sell entry and exit, a bearish crossover or death cross is a strong indication that the price is bearish.

For the bearish crossover, the smaller period 50 TEMA line has to cross below the longer period 200 TEMA line and the price has to be below the two falling TEMA lines. This bearish crossover means that the sellers or the bears are about to take control of the market.

Before placing a sell trade, it is important to wait for more red candles to form before placing a sell trade. For me, I waited for the price to bounce down from the 200 TEMA line which served as the resistance line.

With this, a sell signal is confirmed and a sell trade can be placed with appropriate risk management strategies like take profit and stoploss.

With a risk:reward ratio of 1:2, take profit and stoploss is set for the sell entry and exit.

Question 7 - Use an indicator of choice in addition with crossovers between two TEMAs to place at least one demo trade and a real margin trade on an exchange (as little as $1 would do). Ideally, buy and sell positions (Apply proper trade management). Use only 5 - 15 mins time frame. (Screenshots required).

Even though the TEMA indicator has proven to be a very effective indicator for buy and sell signals, it is always a good idea to combine the TEMA indicator with another technical indicator for a more quality signal when it comes to placing a buy or sell trade using the signals from the TEMA indicator.

I will be using the TEMA indicator with the RSI indicator which is a good indicator for identifying overbought and oversold zones.

Buy trade on the AVAX/USDT

For the buy trade on the AVAX/USDT 5 mins chart, the buy signal was identified after the occurance of the bullish crossover or golden cross. I placed a buy entry for AVAX/USDT at 84.22 and using the 1:2 risk:reward ratio, I set my take profit at 85.21 and stoploss at 83.72.
Buy entry - 84.22
Take profit - 85.21
Stoploss - 83.72
After placing the buy entry, I was able to make a profit of +170 USD

Question 8 - What are the advantages and disadvantages of TEMA?

Advantages

• The TEMA indicator is easy to understand and use
• TEMA indicator can be combined with a lot of other technical indicators like RSI, MACD for quality signal and signal confirmation
• TEMA generates reliable signals when compared with the SMA or the EMA
• The TEMA indicator provides signals ahead because there is no lagging and it is a leading indicator
• TEMA indicator can work in any timeframe, whether for short term analysis or long term analysis
• TEMA indicator eliminates noise by smoothens the noise
• TEMA indicator is great for identifying trends in the market

Disadvantages

• TEMA indicator can be prone to false signals during a high sharp market volatility
• Because TEMA eliminates lagging, there is a possibility for the signal to be false because of its quick reaction to price changes
• It is easier to miss important signals when using the TEMA indicator as it is a leading indicator that reacts quickly to price changes.
• In a ranging market or sideways movement, the TEMA indicator is almost not useful as there isn’t any reliable signals generated
• Because the TEMA indicator is a leading indicator, it is always advisable not to use it alone and to use it in combination with other indicators for signal confirmation before making trading decisions.