Triangular Moving Average

Advertisement

Introduction

Moving averages are one of the most widely used trading indicators employed by traders today. Moving averages are simple and intuitive to use for traders regardless of their trading or investing experience. On the opposite side of the spectrum, moving averages are not immune from critics. One of the biggest criticisms with moving averages for trading purposes is that it is a lagging indicator that can produce false signals as due to lags in data. Looking to produce better trading results some trader have chosen to use the Triangular Moving Average (TMA) with its extra smoothing technique to produce cleaner moving averages for trading purposes.

Formula

Where:

SMA = Simple Moving Average Formula
TMA = Triangular Moving Average
n = number of the timeframes being evaluated

Interpretation

The formula will produce data weighting that is as one may have guessed from its name shaped like a triangle. The greatest weightings are given to the data in the middle of the time period chosen. Data samples that have an odd number of data points will a middle data point will that form a single peak. For Data samples with an equal number of data points will have to two middle points that are of equal height and form the peak of the triangle.

As with all moving averages, the triangular moving average (TMA) is designed to smooth out short-term fluctuations and highlight the longer-term trends or cycles of prices. The triangular moving average differentiates itself from other moving averages in that it is double smoothed or more simply put that the data is averaged twice. The double smoothing will produce moving averages will be smoother and have more waves, than other moving averages. The triangular weighting (middle weighting) should result in a less responsive moving average but for some reason or another appears to produce averages that some traders believe are more sensitive and responsive to trend changes.

The triangular moving average can be used to identify trends by observing the slope of the moving average or using multiple moving averages. TMA can also be used to create buy and sell signals with moving average crossovers.

Advertisement

Trend Identification

Triangular Moving Average Stock Charting Indicator TMA

Moving averages allow traders to quickly spot intermediate to long term trends with the quick look of a price chart. In the above daily chart of Applied Materials we see that AMAT was traded in an upward trend that began in September 2010 and continue up to March 2011 where price topped out. A simple buy trade would have been trigged when prices closed above the moving average in the second week of September.

Triangular Moving Average Stock Charting Indicator TMA

In the Above daily chart of the AMAT we can see how the double averaging of the red TMA line is more responsive than the yellow simple moving average line. If you look closer at the two moving averages you will see that the Triangular Moving Line has more waves then the SMA which is a result of the TMA reacting to more of the underlying swings in AMAT prices than the simple moving average line.

Double Crossover

Triangular Moving Average Stock Charting Indicator TMA

The double moving average crossover is one of the most popular trading strategies uses by traders today. In the above chart of daily chart of Intel we can see how effective the Triangular Moving Averages is opposed to using the simple moving average for the double crossover strategy. Using a red 12-period TMA as the signal line and a yellow 24-period TMA to be a proxy for the intermediate trend we can see this strategy produced 4 signals from the end of May 2011 to September 2011.

Triangular Moving Average Stock Charting Indicator TMA

In the above chart of INTC we have added the 12-period and 24-period simple moving averages for comparison. The 12-period SMA is the green dotted line for the trigger line and the 24-period SMA is the light blue dotted line for the intermediate trend line. Looking closely we see that the simple moving averages produced trigger signals one to two days after the triangular moving average lines. In volatile markets this can have significant impact on the overall profitability as entries could be a point or more later than if one were to use the TMA’s for this strategy.

Support

Triangular Moving Average Stock Charting Indicator TMA

Moving averages can be used to find support levels and very useful spot buying entry points on price retracements in intermediate trends. In the daily chart price of SPY we see that the market was in a nice uptrend which started in November 2010 and continued up until February. Looking at the chart we can the moving average line hugging the price action and providing support in this move higher.

Resistance

Triangular Moving Average Stock Charting Indicator TMA

One common tenets of technical analysis is that support once broken becomes resistance. Looking closely we see how the SPY briefly traded below the moving average as market participants debated which way the market was heading next. A bullish signal was not triggered until prices closed above the moving average for a Christmas rally in late 2010.

Conclusion

Moving averages are great tools for traders looking to ride market up and down swings. To be successful it’s imperative that you understand all of the positives and negative characteristics the type of moving average you are utilizing. Regardless of which type you choose, all moving averages are lagging indicators that display historical price movement and will not predict future price action. Ultimate success using moving averages is determined by catching long term trends and managing your capital efficiently. By trading with TMAs versus trading with SMA’s your moving average line will be smoother which can guide you in volatile markets and reduce moving average lags making it easier to spot trends. Like all technical indicators, traders can increase their probability of success by employing multiple indicators to confirm trading signals. Regardless of what trading strategy you choose, you must select a strategy that fits your personality and ability to handle risk. As we have seen the TMA produce smoother trend lines that are more responsive to changes in price than the SMA. The Triangular Moving Average is a versatile tool that can be used to improve your trading.