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:
\[ \text{DEMA} = 2 \times \text{EMA}(n) - \text{EMA}(\text{EMA}(n)) \]
where:
- \(\text{EMA}(n)\): 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:
graph TD;
A[Price Movements] --> B[Simple Moving Average]
A --> C[Double Exponential Moving Average]
B --> D{Lag Effect?}
C --> D
D -- No --> E[Better Trend Signals]
D -- Yes --> F[Lags behind Price Changes]
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
## What does DEMA stand for?
- [x] Double Exponential Moving Average
- [ ] Dynamic Exponential Moving Average
- [ ] Difficult to Explain Moving Average
- [ ] Double Extra Marginal Average
> **Explanation:** DEMA stands for Double Exponential Moving Average, a tool meant to smooth price data while minimizing lag.
## Which statement about DEMA is true?
- [x] It reduces lag compared to traditional moving averages.
- [ ] It guarantees profits on every trade.
- [ ] It requires a PhD to understand.
- [ ] It is always used in conjunction with dangerous high-flying stunts.
> **Explanation:** The key feature of DEMA is that it reduces lag, making it a responsive tool for traders — no degrees required!
## How does DEMA improve upon Simple Moving Averages?
- [ ] DEMA uses half the data.
- [x] DEMA utilizes two EMAs to smooth price fluctuations.
- [ ] DEMA creates a fun disco effect on graphs.
- [ ] DEMA is easier to spell.
> **Explanation:** DEMA uses two exponential moving averages to create a smoother curve and lessen the lag.
## When should you consider buying according to DEMA?
- [ ] When prices dive below the DEMA
- [x] When prices cross above the DEMA
- [ ] When you flip a coin and get heads
- [ ] When your cat knocks over your laptop
> **Explanation:** A crossover of price above the DEMA potentially indicates a buying opportunity: no laptop disasters necessary!
## What year was DEMA introduced?
- [ ] 1982
- [ ] 1990
- [x] 1994
- [ ] 2005
> **Explanation:** DEMA was introduced in 1994 by Patrick Mulloy, proving that even mathematics can contribute to market trends.
## Which indicator does NOT follow the DEMA principles?
- [ ] Exponential Moving Average (EMA)
- [ ] Simple Moving Average (SMA)
- [x] Randomized Reality Check Average
- [ ] All of the above
> **Explanation:** While SMA and EMA can position themselves next to DEMA, Randomized Reality Check Average is merely figment of imagination in trading.
## In which publication did DEMA first appear?
- [ ] Wall Street Journal
- [ ] Tech Weekly
- [x] Technical Analysis of Stocks & Commodities
- [ ] The Journal of Trends That Don't Trend
> **Explanation:** DEMA was first discussed in *Technical Analysis of Stocks & Commodities*, proving that great ideas often come from great trades.
## DEMA’s major improvement over EMA is:
- [ ] It doubles the fun
- [ ] It protects you with layers
- [x] It minimizes reaction lag
- [ ] It adds more moving averages for excitement
> **Explanation:** The major improvement of DEMA over EMA is its ability to minimize lag and thus respond more efficiently to price changes.
## Can the DEMA predict market crashes?
- [ ] Yes, always
- [ ] Only on weekends
- [x] No, it only suggests trends
- [ ] Only if you consult it like an oracle
> **Explanation:** DEMA can provide insights into potential trends but predicting crashes? That’s a bridge too far for most indicators!
## Intuitively, DEMA could be thought of as giving you:
- [ ] Reservations for birthday parties
- [x] A clearer view of trends with less disturbance
- [ ] Secret access to the latest trends in shoes
- [ ] Early morning coffee without sleep
> **Explanation:** DEMA provides traders with a clearer view of price trends by reducing "market noise." Thank you very much!
Stay curious and keep trading with a smile! 😊
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