Double Exponential Moving Average(DEMA)
We have learnt so far that the moving averages help us with entry and exit in trading. However, the persistent problem has been the slow process in most types of moving averages. In order to combat this situation and making the calculation of “Moving Average methodology” faster, the (DEMA) was designed.
What is the advantage?
When there is uneven price movement, the DEMA “removes false signals” and “refines entries” thereby creating better probabilities during strong trends.
On a chart, it can be applied as a stand-alone indicator directly or we can integrate it into any technical indicators in order to resolve their values.
The (DEMA) consists of a single Exponential Moving Average and a double Exponential Moving Average where the outcome is less slow when compared to its two individual components (EMA) & a (DEMA).
We need to clearly understand that, it’s not just a combination of two EMAs, nor a repetition of moving average over moving average. We can define it as “A single EMA calculated in association with a double EMA”.
The above chart shows crude oil futures contract two different double exponential moving averages; a 50-day period appears in blue, a 21-period in yellow
How is it calculated?
As discussed earlier, (DEMA) is a composite operation of single and double EMAs producing another EMA with less slow than either of the original two."
DEMA is a calculation of both single and double EMAs.
It is not necessary for us to know how DEMA is calculated as it is incorporated by most trading analysis platforms as an indicator that can be added to charts.
DEMA serves as a restoration of the traditional (MA) methods and is generally preferred by traders due to its ability to spot reversals quicker.
This helps for an early entry into a new trend formed recently.
Add two or three DEMAs with different trackback periods and trade their crossovers.
DEMA can be applied as a stand-alone indicator .
DEMA can act as a complement to other indicators used for trending markets (MACD, Parabolic SAR etc).