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TEMA
Description
TEMA is a unique smoothing indicator developed by Patrick Mulloy. It
was originally introduced in the January 1994 issue of Technical
Analysis of Stocks & Commodities magazine.
As Mr. Mulloy explains in the article:
"Moving averages have a detrimental lag time that increases as the
moving average length increases. The solution is a modified version
of exponential smoothing with less lag time."
TEMA is an acronym that stands for Triple Exponential Moving
Average. However, the name of this smoothing technique is a bit
misleading in that it is not simply a moving average of a moving
average of a moving average. It is a unique composite of a single
exponential moving average, a double exponential moving average, and
a triple exponential moving average that provides less lag than
either of the three components individually.
Interpretation
TEMA can be used in place of traditional moving averages. You can
use it to smooth price data or other indicators. Some of Mr.
Mulloy's original testing of TEMA was done on the MACD. Oddly, he
found that the faster responding TEMA-smoothed MACD produced fewer
(yet more profitable) signals than the traditional 12/26 smoothed-
MACD. A custom indicator named "MACD (TEMA-smoothed)" is included
with MetaStock Pro.
This type of smoothing is certainly not limited to the MACD. You may
want to experiment on other indicators as well.
Click here for information on DEMA, a similar
smoothing method developed by Mr. Mulloy.
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