What is the DEMA?
The Double Exponential Moving Average (DEMA) is a trend-following indicator created by Patrick Mulloy. It aims to address the lagging nature of traditional Exponential Moving Averages (EMAs). DEMAs are designed to be more responsive to price changes, providing quicker signals. This is achieved through a double smoothing process, making it particularly useful for traders seeking to capitalize on short-term trends and reduce whipsaws.
How it Works
The DEMA calculates two EMAs with different smoothing factors. First, a standard EMA is calculated. Then, another EMA is calculated *using the first EMA as its input*. This double smoothing gives more weight to recent prices, resulting in a faster reaction to price movements compared to a single EMA. The formula incorporates a smoothing constant, typically derived from a period setting.
Trading Signals
Trading signals with the DEMA are relatively straightforward. A bullish signal is generated when the price crosses *above* the DEMA, suggesting a potential uptrend. Conversely, a bearish signal occurs when the price crosses *below* the DEMA, indicating a possible downtrend. Traders often combine the DEMA with other indicators for confirmation, such as volume or oscillators.
Basic Settings
The primary setting for the DEMA is the 'Period'. This determines the number of periods used in the calculation. Shorter periods (e.g., 10-20) make the DEMA more sensitive and generate more frequent signals, while longer periods (e.g., 50-100) smooth out price action and provide fewer, more reliable signals. Experimentation is key to finding the optimal period for your trading style. This is for educational purposes only, not financial advice.