What is Double Exponential Moving Average ?

1320 reads · Last updated: September 12, 2024

The double exponential moving average (DEMA) is a technical indicator devised to reduce the lag in the results produced by a traditional moving average. Technical traders use it to lessen the amount of "noise" that can distort the movements on a price chart.Like any moving average, the DEMA is used to indicate the trend in the price of a stock or other asset. By tracking its price over time, the trader can spot an uptrend—when the price moves above its average, or a downtrend—when the price moves below its average. When the price crosses the average, it may signal a sustained change in the trend.As its name implies, the DEMA uses two exponential moving averages (EMAs) to eliminate lag in the charts.This variation on the moving average was introduced by Patrick Mulloy in a 1994 article "Smoothing Data With Faster Moving Averages" in magazine.

Double Exponential Moving Average (DEMA)

Definition

The Double Exponential Moving Average (DEMA) is a technical indicator designed to reduce the lag that occurs with traditional moving averages. Technical traders use it to minimize the noise that can distort the dynamics on a price chart. Like any moving average, DEMA is used to indicate the price trend of a stock or other asset. By tracking its changes over time, traders can identify an uptrend—when the price rises above its average level, or a downtrend—when the price falls below its average level. When the price crosses the average line, it may signal a sustained change in trend.

Origin

This modification to the moving average was introduced by Patrick Mulloy in a 1994 article titled "Smoothing Data with Faster Moving Averages." Mulloy's research aimed to eliminate lag in charts by using two Exponential Moving Averages (EMAs), thereby providing more timely trading signals.

Categories and Characteristics

The main feature of DEMA is that it combines two Exponential Moving Averages (EMAs) to reduce lag. The specific formula is: DEMA = 2 * EMA - EMA(EMA). This method makes DEMA more responsive to price changes than a single EMA, providing more timely buy and sell signals.

Compared to other moving averages, the advantage of DEMA is its faster response to price changes, reducing lag. However, this also means it may be more sensitive to short-term fluctuations, potentially generating more false signals.

Specific Cases

Case 1: Suppose the price of a stock has been gradually rising over the past 20 days. Using a 20-day DEMA, a trader can identify the uptrend earlier and make a buy decision when the price breaks above the DEMA.

Case 2: In a highly volatile market, DEMA can help traders identify trend reversals more quickly. For example, when the price falls from a high point and breaks below the DEMA, a trader can make a timely sell decision to avoid larger losses.

Common Questions

1. How is DEMA different from EMA?
DEMA uses two EMAs to reduce lag, while EMA uses only one. The formula for DEMA is: DEMA = 2 * EMA - EMA(EMA).

2. Is DEMA suitable for all markets?
DEMA is suitable for most markets, but it may generate more false signals in highly volatile markets. Traders should adjust parameters based on specific market conditions.

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