Double exponential moving average

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Table of Contents:

  1. Definition
  2. Formula

Double Exponential Moving Average (DEMA) Definition:

The Double Exponential Moving Average (DEMA) is a technical indicator that measures the average price of an asset over a specific period of time. It is used to identify trends and potential trend reversals in the market. What sets DEMA apart from other moving averages is that it uses two different exponential moving averages to make its calculations, giving it a smoother and more responsive output.

Double Exponential Moving Average (DEMA) Formula:

The formula for calculating DEMA involves using two separate exponential moving averages (EMAs). The first EMA is calculated using the asset’s closing price, while the second EMA is calculated using the first EMA as its input. Here’s the formula:

  • DEMA = 2 * EMA(n) – EMA(EMA(n))
  • n = number of periods

In this formula, EMA(n) refers to the first EMA, while EMA(EMA(n)) refers to the second EMA that uses the first EMA as its input. By subtracting the second EMA from twice the first EMA, we arrive at the final DEMA value.

 

Table of Contents

  • Introduction to Double Exponential Moving Average (DEMA)
  • How DEMA is Calculated
  • Advantages of Using DEMA
  • Disadvantages of Using DEMA
  • Applications of DEMA in Technical Analysis
  • Conclusion

Introduction to Double Exponential Moving Average (DEMA)

Double Exponential Moving Average (DEMA) is a type of technical analysis indicator used to measure the average price of an asset over a certain period of time. It is similar to other moving averages, but it is more complex as it takes into account two exponential moving averages instead of one.

How DEMA is Calculated

The formula for calculating DEMA involves using two exponential moving averages (EMA) – one short-term and one long-term. The short-term EMA is calculated by taking the price data for a specific number of periods and calculating its average. The long-term EMA is then calculated by taking the short-term EMA and applying the same formula.

The final DEMA calculation involves subtracting twice the short-term EMA from the sum of the long-term EMA and twice the short-term EMA.

Advantages of Using DEMA

  • DEMA is considered to be more responsive to changes in price compared to other moving averages due to the use of two EMAs.
  • It can help traders identify trends more accurately, especially during volatile market conditions.
  • DEMA can be used in combination with other technical indicators to create trading signals that are more reliable.

Disadvantages of Using DEMA

  • The complexity of the calculation for DEMA can make it difficult for novice traders to use and understand.
  • As with other moving averages, DEMA is a lagging indicator, meaning that it may not provide accurate trading signals in real-time.
  • It may not be suitable for all markets or trading strategies.

Applications of DEMA in Technical Analysis

DEMA can be used in a variety of ways in technical analysis. Some common applications include:

  • Identifying trends and trend reversals
  • Generating buy and sell signals based on crossovers between DEMA and other technical indicators
  • Confirming the strength of support and resistance levels
  • Calculating volatility and setting stop-loss orders

Conclusion

DEMA is a unique type of moving average that can be used by traders in technical analysis. While it has both advantages and disadvantages, it can be a useful tool when used correctly and in combination with other technical indicators.

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