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Double Exponential Moving Average (DEMA)

Table of Contents

The Double Exponential Moving Average (DEMA) is a technical indicator used in financial markets to analyze price trends. It is designed to reduce lag and increase responsiveness compared to traditional moving averages.

Calculation of the DEMA

The DEMA is calculated using a two-step process:

  1. Calculate the EMA of the price data.
  2. Calculate the EMA of the previously calculated EMA.

The formula for the DEMA is:

DEMA = (2 * EMA(n)) – EMA(EMA(n))

Where:

  • EMA(n) is the Exponential Moving Average of the price data with period n.
  • EMA(EMA(n)) is the Exponential Moving Average of the previously calculated EMA.

Interpretation of the DEMA

The DEMA is interpreted similarly to other moving averages. Traders look for crossovers between the DEMA and the price data to identify potential buy or sell signals. When the price crosses above the DEMA, it may indicate a bullish trend, while a crossover below the DEMA could signal a bearish trend.

Reading the Double Exponential Moving Average (DEMA)

Interpreting the DEMA is straightforward. When an asset’s price is above the DEMA and the DEMA is ascending, it confirms an upward trend in price. Conversely, when the price is below the DEMA and the DEMA is declining, it confirms a downward trend.

Some traders choose to display multiple DEMAs with different look-back periods on a single chart. Trade signals can emerge when these lines intersect. For instance, a trader might opt to buy if a 20-period DEMA crosses above a 50-period DEMA, or sell when the 20-period crosses back below the 50-period.

Using the DEMA to identify potential support and resistance levels may be less dependable. Traders relying on the DEMA, or any moving average, to pinpoint support or resistance should verify its historical effectiveness in fulfilling this role. If it hasn’t functioned as such in the past, it’s unlikely to do so in the future.

Advantages and Disadvantages of the DEMA

block-heading”>Advantages:

  • Reduced lag compared to traditional moving averages, making it more responsive to recent price movements.
  • Helps traders identify trends more accurately, potentially leading to better trading decisions.

block-heading”>Disadvantages:

  • More complex calculation compared to simple moving averages, which may deter some traders.
  • Like all technical indicators, the DEMA is not foolproof and may generate false signals in certain market conditions.
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