Double Exponential Moving Average (DEMA) Explained
The Double Exponential Moving Average (DEMA) although sounds like a dance move from the future, it is indeed a technical indicator designed to sharpen a trader’s crayons when coloring between the trend lines. Developed by Patrick Mulloy as a twist to the traditional moving average, DEMA is crafted to provide quicker response to price changes in a financial asset.
DEMA is primarily the result of an attempt to reduce the lag inherent in simple moving averages by applying a double smoothing technique. This indicator is particularly handy if you’re involved in high-speed trading scenarios like day trading or you’re simply impatient.
Calculate the Double Exponential Moving Average
Calculating the DEMA isn’t like performing 3D chess maneuvers, but it does require some attention. Here’s the screamer:
- Select a lookback period—think of it as choosing how far back in your financial diary you want to peek.
- Compute the EMA (Exponential Moving Average) of your selected period.
- Calculate another EMA of the first EMA; this is the smoothed version and not a déjà vu.
- Simply double the first EMA and then subtract the smoothed EMA from step 3.
Applications of DEMA
For the tactical traders, DEMA is more than just lines on a chart. Here’s how this nimble tool can jazz up your trading strategy:
- Trend Identification: More responsive than your average moving averages, DEMA cuts through prices like a butter knife, showing you the uptrend and downtrend with fewer drags.
- Signal Generations: Mix DEMA with other indicators, and voila, you have potential buy or sell signals before your fellow traders have their coffee.
- Support and Resistance Levels: Feel like a financial wizard by predicting where prices might hesitate or reverse.
Who Should Use a DEMA?
DEMA is ideal for those who need speed and accuracy—day traders and swing traders. If you have the courage to ride the volatile waves of the stock market, then DEMA is your surfboard. However, for the steadfast long-term investors, this might just be an overcomplicated digital spaghetti.
How to Read DEMA
Interpreting the DEMA involves a simple principle:
- Uptrend Confirmation: If the asset’s price dances above the DEMA and the DEMA itself is on an uphill journey, it’s probably time to think bullish.
- Downtrend Confirmation: If the price slips under the DEMA and the DEMA seems to be taking a dive, bearish thoughts might be warranted.
Related Terms
- Simple Moving Average (SMA): Your go-to average, without the bells and whistles.
- Exponential Moving Average (EMA): The smoother and faster cousin of SMA, providing less choppy price data.
- Triple Exponential Moving Average (TEMA): Thrice as fancy, providing even less lag than the DEMA.
Further Study Suggestions
To get a stronger grip on DEMA and its peers in the technical analysis arena, consider exploring:
- “Technical Analysis of the Financial Markets” by John Murphy - A comprehensive guide that covers various technical indicators including moving averages.
- “Trading for a Living” by Alexander Elder - Dive into trading psychology, strategies, and technical analysis tools such as DEMA.
Lightening the load with humor, may your trading journey with DEMA be less “exponential” and more profitable. Happy trading!
