Trading strategy: Crossing TEMAs

Description

Crossing TEMAs is a trend following strategy. It can be used for swing trading and day trading. The strategy is based on exponential moving averages which are weighted three times. Hence the abbreviation TEMA (Triple Exponential Moving Average). TEMAs tend to indicate trend changes earlier than regular moving averages. The Crossing TEMAs strategy is proposed by the German trading author Claus Grube. According to the author results are promising in each market.

 

  
Suitable for : Any market index (FTSE, CAC, DAX ...)
Instruments : Futures and CFDs
Trading type : Day trading and Swing trading
Trading tempo : Medium to low depending on time frame
The strategy : Video
Using NanoTrader Full : Manual or semi-automated

 

The strategy in detail

We describe the strategy here how it is used in swing trading. For day trading traders need to reduce the time frames.

 

This screenshot compares a regular moving average (green) and a TEMA (red). The TEMA tends to react earlier to trend changes.

When to open a position?

The signal to open a position is given by crossing TEMAs, a fast TEMA and a slow TEMA. The span of the slow TEMA needs to be a Fibonacci number. Author Claus Grube prefers a factor of x5. The fast TEMA is calculated on 56 quarters of an hour (1 day). The slow TEMA is calculated on 5x56x15' (5 days). In the case of low market volatility it is recommended to work with 1/2 day and 2 1/2 day TEMAs respectively.

When the fast TEMA crosses the slow TEMA upwards a long position is taken. The long position is reversed into a short position when the fast TEMA crosses the slow TEMA downwards. Hence, in theory, there is always an open position, either long or short.

 

This screenshot shows the two crossing TEMAs.


Author Claus Grube also proposes, as a variant, to use a signals filter. As a filter he uses long term TEMAs based on day charts. Several combinations of fast and slow TEMAs are proposed. For example, 13 & 21, 21 & 55 and 34 & 55. Adding a filter reduces the number of valid signals.

 

This screenshot shows two crossing TEMAs (56x15’ and 56x5x15’ i.e. 1 and 5 days). The signals given by these crosses are filtered with two long term crossing TEMAs. When the trend is bullish the background is colored green and only buy signals are valid. When the trend is bearish the background is colored red and only short sell signals are valid.

When to close a position?

Claus Grube recommends to not wait until the TEMAs cross again to close the position. In order to secure profits he works with a trailing stop. He uses a 30-point trailing stop for trading the Eurostoxx index. If you apply this strategy to another market index or financial instrument you need to adjust this value accordingly.

 

Conclusion

The Crossing TEMAs strategy was originally designed by author Claus Grube for trading the EuroStoxx 50 index. He is convinced, however, that the strategy can be applied with similar success to other market indices. As is the case with other trend following strategies, the Crossing TEMA strategy is less suitable for markets which are moving sideways.

Practical implementation

In NanoTrader Full follow these steps:
  • Choose the instrument you wish to trade.

  • Open a chart with the template study "WHS Crossing TEMAs".

  • Note: The trading system available in the NanoTrader Full platform does not use the filter variant suggested by Claus Grube. The filter does give fewer trades but backtesting show that it also reduces profits. Traders can ad their own filter if they wish.

  • Semi-automated trading? Simply activate the TradeGuard+AutoOrder or the AutoOrder function.