What is the DEMA?§
The Double Exponential Moving Average (DEMA) is a technical analysis tool that seeks to provide a more responsive moving average by mitigating the lag that is inherent in conventional moving averages. Created by Patrick Mulloy in 1994, DEMA combines two exponential moving averages to offer a sharper insight into price trends of an asset. It’s like putting on a pair of glasses when all you could see were fuzzy shapes.
Formula:
The formula for calculating DEMA is as follows:
where:
- : The Exponential Moving Average of the asset price for n periods.
DEMA vs Simple Moving Average (SMA):§
| Feature | Double Exponential Moving Average (DEMA) | Simple Moving Average (SMA) |
|---|---|---|
| Lag | Less lag (more responsive) | More lag (slower to react) |
| Smoothing | Smoother response to price movements | Blunts sharp movements |
| Calculation | Uses two EMAs for calculation | Simple average of prices over time |
| Trend Indication | Good at indicating short-term trends | Better for long-term trend identification |
Examples:§
- Uptrend Identification: If the DEMA starts moving upward and the price crosses above it, this may signal a potential buying opportunity.
- Downtrend Indication: When the price falls below the DEMA and the DEMA itself starts to slope downwards, this suggests a selling opportunity.
Related Terms:§
- Exponential Moving Average (EMA): An average that gives more weight to recent data.
- Simple Moving Average (SMA): An average that treats all data points equally over a specific period.
- Trend Analysis: The statistical technique used to detect the direction of prices.
Diagram:§
Humorous Quotes and Facts:§
- “Moving averages are like GPS: they help you avoid crash landings into bad trades… if you don’t ignore the voice that says ‘recalibrating’!”
- Fun Fact: The first moving average was calculated in the same year that disco was declared “a thing.” Coincidence? We think not!
Frequently Asked Questions:§
1. What are the advantages of using DEMA over other moving averages?
DEMA reduces lag time, providing quicker insights into potential trend changes without getting caught in the “noise.”
2. Can DEMA guarantee successful trades?
As much as we wish it could, DEMA is just a tool. Success depends greatly on how you wield it (and a bit of luck).
3. Where can I calculate DEMA?
Many trading platforms include DEMA as an indicator, or you can use online calculators that compute moving averages.
References:§
- Patrick Mulloy, Smoothing Data With Faster Moving Averages, Technical Analysis of Stocks & Commodities Magazine.
- Investopedia: Moving Averages Explained
- “Technical Analysis from A to Z” by Steven B. Achelis
Suggested Readings:§
- “Technical Analysis of the Financial Markets” by John J. Murphy
- “Trading in the Zone” by Mark Douglas
Test Your Knowledge: Double Exponential Moving Average (DEMA) Quiz§
Stay curious and keep trading with a smile! 😊
