Double Exponential Moving Average
This lesson will cover the following
Developed by Patrick Mulloy, the Double Exponential Moving Average is a fast-acting moving average that is designed to reduce the reaction lag and be more responsive than a traditional moving average.
The DEMAs advantage is that it eliminates false signals during choppy price movement, and thus filters entries for better possibilities during strong trends.
It can be used either as a stand-alone indicator directly on the chart, or you can incorporate it into other technical indicators in order to iron out their values.
The Double Exponential Moving Average is composed of a single Exponential Moving Average and a double Exponential Moving Average that produces less lag compared to its two individual components. It is not simply a combination of two EMAs, nor it is a moving average of a moving average, rather a single EMA calculated in conjunction with a double EMA. The screenshot below illustrates one.
Chart source: VT Trader
The calculation of the DEMA looks as follows:
Double EMA = 2*EMA – EMA(EMA)
In case you seek further details, here is the full calculation (not required to know for trading):
Since DEMA is based on the EMA, first we need to estimate the error of price deviation from EMA value:
err(i) = Price(i) – EMA(Price, N, I), where:
– err(i) is the current EMA error
– Price(i) is the current price
– EMA(Price, N, I) is the current EMA value of the price for the N period
To calculate DEMA we need to add the value of the EMA error to the value of the ЕМА:
DEMA(i) = EMA(Price, N, i) + EMA(err, N, i) = EMA(Price, N, i) + EMA(Price – EMA(Price, N, i), N, i) = 2 * EMA(Price, N, i) – EMA(Price – EMA(Price, N, i), N, i) = 2 * EMA(Price, N, i) – EMA2(Price, N, i), where:
– EMA(err, N, I) is the current value of the exponential average of error
– EMA2(Price, N, I) is the current value of the double consequential smoothing of prices.
The Double Exponential Moving Average is generally used as a replacement of traditional moving averages in trading strategies based on the latter. It is available across most trading platforms and many traders prefer it over conventional MAs due to its responsiveness and ability to spot reversals sooner, which allows for an earlier entry into a recently formed trend.
A viable strategy is to add two or three DEMAs with different trackback periods and trade their crossovers (just like ordinary moving averages). Apart from its usage as a stand-alone indicator, the DEMA can act as a complement to other indicators used for trending markets (MACD, Parabolic SAR etc).