The Double Exponential Moving Average (DEMA) reduces the lag of traditional EMAs, making it more responsive and better-suited for short-term traders. DEMA was developed by Patrick Mulloy, and introduced in the January 1994 issue of Technical Analysis of Stocks & Commodities magazine.
The overlay uses the lag difference between a single-smoothed EMA and a double-smoothed EMA to offset the single-smoothed EMA. This offset produces a moving average that remains smooth, but stays closer to the price bars than either the single- or double-smoothed traditional EMA.
Single- and Double-Smoothed EMAs: EMA1 = EMA of price EMA2 = EMA of EMA1 DEMA = (2 x EMA1) - EMA2
Essentially the formula takes the lag difference between the somewhat lagging single-smoothed EMA1 and the even more lagging double-smoothed EMA2, then subtracts that difference from EMA1. This calculation produces a smoothed line that is much closer to the price bars than either EMA1 or EMA2.
DEMA is interpreted in a similar way to traditional EMAs, but responds more quickly. Like other EMAs, it can be used to confirm a trend or spot a change in the trend.
The most commonly-used signal is the DEMA crossover. Watch for the DEMA line to cross the price bars, or for a shorter-term DEMA to cross a longer-term DEMA, to indicate a change in trend. For example, the 20-day DEMA crossing above the 50-day DEMA would be a bullish signal.
These DEMA crossovers (whether of price or another DEMA) typically happen much earlier than the corresponding traditional EMA crossover. In the example below, the green arrows mark DEMA crossovers and the blue arrows mark the corresponding EMA crossovers. In both cases, the DEMA crossover happens before the EMA crossover.
Keep in mind that because DEMA reacts more quickly than traditional EMAs, your trading strategies may need to be adjusted for use with DEMA.
Price crossovers and other signals generally occur sooner with DEMA than with traditional EMAs. The reduced lag and greater responsiveness of DEMA appeals to short-term investors, but long-term investors may find traditional moving averages more useful. As with all technical indicators, traders should use DEMA in conjunction with other indicators and analysis techniques.
The DEMA overlay can be charted on StockChartsACP after installing our free Advanced Indicator Pack. Please see our StockChartsACP Plug-Ins article in the Support Center for more information on installing this plug-in.
Once the plug-in is installed, the DEMA overlay can be added from the Chart Settings panel for your StockChartsACP chart. DEMA can be overlaid on the security's price plot or on an indicator panel.
By default, the moving average is calculated with 20 periods, but the number of periods can be adjusted to meet your technical analysis needs.
Smoothing Data With Faster Moving Averages by Patrick G. Mulloy
Jan 1994 - Stocks & Commodities V.12:1 (11-19)