Introduction to the TEMA Indicator
Most moving average lines tend to have a weakness which is lag. This often causes traders to make trade decisions too late.
The Triple Exponential Moving Average (TEMA) Indicator was developed by Patrick Mulloy during the mid-1990s to create a moving average line which minimizes lag as much as possible.
What is the TEMA Indicator?
The TEMA Indicator is a modified moving average indicator which is derived from the Exponential Moving Average (EMA).
It plots a moving average line which is characteristically very responsive to price movements and tends to follow price action very closely.
How the TEMA Indicator Works?
The TEMA Indicator uses a formula which adds another layer of weight on the basic EMA line. In fact, it can also be computed using the Double Exponential Moving Average (DEMA). The formula below shows how the TEMA line is computed.
TEMA = (3 x EMA1) – (3 x EMA2) + (EMA3)
Where:
EMA1 = EMA of price
EMA2 = EMA of EMA1
EMA3 = EMA of EMA2
Given this formula, we could say that the TEMA basically has three layers of EMAs, which is why it is called the Triple Exponential Moving Average. This formula places more emphasis on recent price movements which is what makes the TEMA line more responsive.
How to use the TEMA Indicator for MT4
The TEMA Indicator has one variable which modifies its sensitivity to price movements.
The “EMA_period” variable changes the number of bars used to compute for the TEMA line. The lower the variable input, the more responsive the line becomes.
This indicator may be used as a regular moving average is used. It can be used to detect trend direction based on where price action generally is in relation to the TEMA line or the slope of the TEMA line.
It can also be used as a dynamic support and resistance level where price can pullback during trending markets.
However, given the responsive nature of this moving average line, the TEMA is best suited as a component in a moving average crossover entry. It is also best to use these crossovers merely as an entry trigger or signal which is in confluence with a longer-term trade setup.
In the examples below, we will be pairing the TEMA line with the 21-period Simple Moving Average (SMA).
Buy Trade Setup
When to Enter?
Open a buy order as soon as the TEMA line crosses above a slower moving average line. Set the stop loss on the support below the entry candle.
When to Exit?
Set a take profit target based on the opposing resistance level.
Sell Trade Setup
When to Enter?
Open a sell order as soon as the TEMA line crosses below a slower moving average line. Set the stop loss on the resistance above the entry candle.
When to Exit?
Set a take profit target based on the opposing support level.
Conclusion
As with most moving average crossover strategies, not all crossovers would result in a strong run or an actual trend reversal. This is why it is best to use such crossovers only in confluence with a bigger picture trade setup which is usually found on the higher timeframes.
It is also best to practice using this moving average first and tweak its sensitivity as you find fit for your strategy before using it in a live trade account.
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