Triple Exponential Moving Average (TEMA) Trading Strategy: Backtest and Evaluation
Triple exponential moving average strategy
One of the not-so-common moving average indicators used by traders is the triple exponential moving average (TEMA). It is an important trend indicator used by traders to identify trends more closely than a traditional moving average. But do you know what it is? And do you know if a triple exponential moving average strategy can be used profitably in the stock market?
Yes, triple exponential moving average strategies do work. Our backtests show that a triple exponential moving average can be used profitably for long-term trend-following strategies on stocks.
The triple exponential moving average, TEMA, is a trend following indicator used by analysts. It is formulated by creating multiple exponential moving averages (EMA) of the original EMA to reduce some of the lag. It helps to reduce price volatility to make the trend easier to identify.
Triple Exponential Moving Average TEMA strategy backtest and best settings
It’s nice to know the theory behind the triple exponential moving average, but does it really work? It’s time to backtest and put the theory to the test:
Does a triple exponential linear-moving average strategy work? Can you make money by using triple exponential moving average strategies?
We look at the most traded instrument in the world: the S&P 500. We test on SPDR S&P 500 Trust ETF which has the ticker code SPY.
All in all, we do four different backtests:
- Strategy 1: When the close of SPY crosses BELOW the N-day moving average, we buy SPY at the close. We sell when SPY’s closes ABOVE the same average. We use CAGR as the performance metric.
- Strategy 2: Opposite, when the close of SPY crosses ABOVE the N-day moving average, we buy SPY at the close. We sell when SPY’s closes BELOW the same average