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Double Exponential Moving Average (DEMA)

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The DEMA works by applying a double exponential smoothing equation to the standard moving average, giving it twice the influence of data points further back in the chart record. This helps to reduce lagged expected results and smooth the average price of the asset more accurately. To calculate the DEMA, a two-step system is used. The first step is to calculate the original exponential moving average, a usual formula. The second step involves smoothing the EMA further with another EMA equation. The result is twice the influential power of the most distant data points in the period charted in comparison to the standard moving average.

In trading, the DEMA is most often used as a crossover trading system. When the DEMA crosses above the current price, it signals a potential uptrend. Similarly, a potential downtrend is indicated when the indicator crosses beneath the spot price. As with any technical indicator, the DEMA should not be used in isolation, but rather should be supported by other signals before actively trading on the indicator. As DEMA significantly reduces the lag associated with traditional moving average calculation, traders may opt for shorter periods, giving them access to fresher data points for a more reliable signal.

The DEMA indicator is a powerful trading system as it offers traders a significant advantage over the lag associated with the traditional moving average model. As with any trading system, however, the DEMA is not foolproof. While it reduces the lag, it remains susceptible to the distortion of irrelevant market fluctuations. As such, it should never be used alone and should be combined with other indicators for a conservative trading strategy.

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