Saturday, April 21, 2012

Double Exponential Moving Average (DEMA)

DEMA - quick summary

Double Exponential Moving Average (DEMA) is a smoother and faster Moving average developed with the purpose of reducing the lag time found in traditional moving averages.

DEMA was first time introduced in 1994, in the article "Smoothing Data with Faster Moving Averages" by Patrick G. Mulloy in "Technical Analysis of Stocks & Commodities" magazine.

In this article Mulloy says:
"Moving averages have a detrimental lag time that increases as the moving average length increases. The solution is a modified version of exponential smoothing with less lag time.."

 DEMA indicator formula

DEMA default period (t) = 21.
DEMA is not just a double EMA.
DEMA is also not a moving average of a moving average.
It's a combination of a single + double EMA for a lesser lag than either of the original two.

How to trade with DEMA

DEMA can be used instead of traditional moving averages or the formula can be applied to smooth out price data for other indicators, which are based on moving averages.

DEMA can help to spot price reversals faster, comparing to regular EMA.

Such popular trading method as Moving average crossover, will gain a new meaning with DEMA.

Let's compare 2 EMA crossover vs 2 DEMA crossover signals.


Some of Mulloy's original testing of DEMA indicator was done on the MACD, where he discovered that the DEMA-smoothed MACD was faster to respond, and despite producing fewer signals, gave higher results than the regular MACD.





Besides MACD, DEMA smoothing method can be applied to various indicators.

Patrick G. Mulloy says:
"..Implementing this faster version of the EMA in indicators such as the moving average convergence/divergence (MACD), Bollinger bands or TRIX can provide different buy/sell signals that are ahead (that  is, lead) and respond faster than those provided by the single EMA.."


Another smoothing method developed by Mulloy is known as TEMA, which is a Triple Exponential Moving Average or, yet another Triple EMA version, developed by Jack Hutson - TRIX indicator.


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