Trade Using the Triangular Moving Average – TMA
Description and Uses
In stock trading, the triangular moving average (TMA) is a technical indicator that is similar to other moving averages. The TMA shows the average (or mean) price of an asset over a specified number of data points—usually a number of price bars. However, the triangular moving average differs in that it is double smoothed—which also means averaged twice.
A triangular moving average can be calculated using various input data, such as prices, volume, or other technical indicators. Triangle moving averages are most often applied to the price of an asset. The moving average overlays the price bars on a chart. It can also overlay the volume indicator if being applied to volume or any other indicator chosen by the trader. The TMA is the blue line in the SPDR S&P 500 chart example.
Triangular Moving Average Calculation
The triangular moving average (TMA) is an average of an average, of the last N prices (P).
First, calculate the simple moving average (SMA):
SMA = (P1 + P2 + P3 + P4 + ... + PN) / N
Then, take the average of all the SMA values to get TMA values.
TMA = (SMA1 + SMA2 + SMA3 + SMA4 + ... SMAN) / N
The TMA can also be expressed as: TMA = SUM (SMA values) / N
Luckily, you don't need to calculate anything; trading software and charting packages crunch all the numbers for you.
Not all chart platforms have a TMA indicator. To see if yours does, open a chart. Then go to your indicators. Search for "Triangular Moving Average." If it isn't there, try applying a normal Moving Average (MA), then go into the setting for the MA and see if you can change its calculation to Triangular. Some platforms also label the TMA as "Moving Average Triangular" or "MovAvgTriangular."
Another option is to apply an SMA (1) to your chart, and then apply another SMA (2) which uses SMA (1) as its input.
Triangular Moving Average Trading Uses
The purpose of the triangular moving average is to double smooth the price data, which will produce a line on your chart which doesn't react as quickly as an SMA would. It can be advantageous or problematic, depending on what you are using the TMA for.
The TMA won't react quickly in volatile market conditions—meaning it will take longer for your TMA line to change direction. If you are using the TMA as a trade signal, then the TMA may react too slowly.
That the TMA lags can be a benefit though. If the price moves back and forth (range), the TMA won't react as much, thus letting you know the trend hasn't shifted. It takes a more sustained move in the price to cause the TMA to change directions.
If you want a moving average that responds quickly to price changes, the TMA is not it. A front-weighted moving average, exponential moving average (EMA), or even an SMA is likely a better choice if you are looking for a responsive moving average. The TMA is a good choice if you want an indicator that doesn't react as much, or as often, to price changes.
Final Word on the Triangular Moving Average
A TMA is an average of an average, creating a line on your chart that typically moves in steadier and longer waves than an SMA. The TMA calculation is the SUM of SMA values, divided by the number of periods you want to average. The TMA reacts slower to price changes than other moving averages, such as the EMA and SMA. It can sometimes keep you in a trend longer, producing bigger profits. But when the trend does turn, the TMA will react slowly, which could mean you give up profits (could have gotten out earlier with another indicator).
There is no perfect indicator or moving average. It is all about how you use it. Test out the TMA for yourself before utilizing it with real capital. During your testing, use various settings and see if the indicator helps you make better trading decisions.