Trading weapon-Double Exponential Moving Average (DEMA)

DEMA, short for Double Exponential Moving Average, is the best momentum indicator and key to scalping strategy in forex support and resistance trading.

What is the Double Exponential Moving Average?

In 1994, Patrick Mulloy proposed the concept of DEMA for the first time in a technical analysis index designed to solve the lag problem of traditional moving averages in his paper “Smoothing Data with Faster Moving Averages ” published in the journal “Technical Analysis.” When the traditional moving average line tracks the price trend, due to the average processing of historical data, it often fails to reflect the latest changes in price in time, resulting in signal delay. DEMA uses two exponential moving averages (EMAs) to reduce this lag through a unique calculation method.

The yellow line is the simple moving average line, the red line is the exponential moving average line (EMA), and the green line is the DEMA line. We can observe that the DEMA is the closest to the price point and the deviation is the smallest.

Simply speaking, DEMA is a secondary processing based on EMA. Its calculation formula is DEMA = 2 × EMA (n) - EMA (EMA (n)), where n is the backtracking period, that is, the period selected to calculate the moving average. For example, if 10 days are selected as the backtracking period, the EMA of 10 days is calculated first, and then the EMA of 10 days is calculated once for 10 days.

Finally, the value of DEMA is obtained by the above formula. This calculation method enables DEMA to follow the price trend more closely. Because the DEMA line is closest to the stock price, it is most sensitive to stock fluctuations and captures the signal of price changes in time. The change of volatility is a good indicator of trend reversal and, therefore, a good indicator of stock trading.

What is the Calculation Principle of DEMA?

Select the backtracking period: traders can choose the appropriate backtracking period according to their own trading strategies and market characteristics. Short-term transactions may choose shorter cycles, such as 5 days and 10 days, to quickly capture short-term price fluctuations; long-term investors may choose longer periods, such as 50 days and 100 days, to grasp the long-term trend.

Calculate EMA (n ): Calculate the exponential moving average of the price with the selected backtracking period n. The calculation of EMA gives higher weight to the recent price, which can better reflect the recent price changes. Its calculation formula is EMA = [current price × (2 / (n + 1))] + [the previous day EMA × (1 - 2 / (n + 1))]. When calculating for the first time, the simple average price of the previous days can be used as the initial EMA value.

Calculate EMA (EMA(n)): For the EMA value obtained in step 2, the same backtracking period n is applied again for the exponential moving average calculation.

DEMA is obtained by multiplying the EMA (n) obtained in step 2 by 2 and then subtracting the EMA (EMA (n)) obtained in step 3; the value of DEMA is obtained.

Although the calculation of DEMA is relatively complex, with the help of modern trading software and spreadsheet tools, such as MetaTrader, Excel etc., traders can easily obtain DEMA data and apply it to transaction analysis.

What are the Functions and Advantages of DEMA?

DEMA combines trend tracking, fast signal recognition, and key position judgment, which is suitable for multi-market transactions such as stocks, foreign exchange, and futures.

Continuation: Traders use these clues to make more or less and use targeted trading strategies to make profits. Targeted trading strategies are a trading method for investors to make profits by predicting the direction of market ups and downs. If expected to rise, do more; if expected to fall, short. Such strategies can also be combined with volatility bets, such as cross-style, wide-span combinations, etc.

Schematic Diagram	Signal	Applicable Scenarios	Operation	Profit Characteristics
	Bull Call Spread	Bullish market, but hope to reduce the cost of buying call options.	Buy a low strike price (K1) call option + sell a high strike price (K2) call option.	The maximum income = K2-K1-net royalty (price ≥ K2 ).Risk is limited (only loss of net royalties ).
	Bull Put Spread	Mild call, by selling put options to reduce costs	Sell a high strike price (K2) put option + buy a low strike price (K1) put option.	The maximum income = net royalty (price ≥ K2 )Risk = K2-K1-net royalty
	Bear Call Spread	Bearish market, but limit potential losses.	Sell a low strike price (K1) call option + buy a high strike price (K2) call option.	The maximum income = net royalty (price ≤ K1 )Risk = K2-K1-net royalty
	Bear Put Spread	Strongly bearish and hope to reduce the cost of buying put options.	Buy high strike price (K2) put options + sell low strike price (K1) put options.	The maximum income = K2-K1-net royalty (price ≤ K1 )Risk is limited (only loss of net royalties).

The vertical axis represents income, that is, profit minus premium, and the horizontal axis represents price. The blue line represents the long and short positions of the call option, and the orange line represents the return of the call option.

How to Use DEMA in Different Trading Strategies?

In the field of trading, DEMA, with its unique characteristics, adapts to various trading strategies.

Intraday Trading Strategy

In intraday trading, DEMA reacts quickly. Intraday traders often use short-period DEMA, such as 5 minutes and 15 minutes, combined with RSI, KDJ, and other indicators to capture opportunities. When the 5-minute DEMA is quickly broken by the price, and the RSI sends a buy signal after overselling, it can be bought and sold when the price rises to the resistance level or the DEMA turning point.

Swing Trading Strategy

In band trading, traders focus on long-term DEMA, such as 20 days and 50 days, to grasp the medium-term trend. The price band rise callback to the vicinity of the DEMA on the 20th and break upward, which is the signal of the increase; if it falls below the 50-day DEMA and the DEMA turns downward, it indicates the end of the band rise, and it needs to be closed, such as the band market of a stock in the stock market.

Multi-Timeframe Analysis Strategy

Under the multi-period analysis strategy, traders judge the long-term trend through the long-period DEMA of the daily chart and use the short-period DEMA, such as the hour chart, to find the short-term timing. When the 100-day DEMA shows a long-term rise, and the 10-period DEMA shows that the end of the price callback will be broken, the entry point can be found in the hour chart, and the short-term income can be obtained by the long-term trend.

DEMA vs. Other Moving Averages

In the field of technical analysis, DEMA has its own advantages and disadvantages compared with SMA and EMA, and its performance varies in different market environments.

Compared with SMA, SMA is simple to calculate and treats all data equally, but it is slow to respond to price changes and has a significant lag. In contrast, DEMA uses exponential weighting and double averaging, paying more attention to recent prices and being able to quickly keep up with price trends. When prices fluctuate rapidly, SMA often shows no obvious response, but DEMA can send out trend signals in time to help traders grasp the market rhythm.

Compared with EMA, although EMA gives higher weight to the recent price and the reaction speed is better than SMA, DEMA is further optimized based on EMA and is more sensitive to price changes. In the upward trend, DEMA is closer to the price, can confirm the continuation or turning point of the trend earlier, and can also provide more accurate signals when the price fluctuates in the short term.

However, the high sensitivity of DEMA makes it easy to generate noise and false signals when prices fluctuate violently or markets are consolidated, which leads to frequent trading by traders and increases the risk of costs and losses. Traders can combine indicators such as the Bollinger Band or observe the number of effective breakthroughs in the price of DEMA to improve signal reliability. In addition, DEMA performs well in markets with obvious trends, but it does not perform well in markets with complex trends and no obvious trends. At this time, traders should adjust their strategies flexibly, reduce their dependence on DEMA, and carry out interval trading with the help of CCI indicators.

Conclusion

The Double Exponential Moving Average (DEMA) is a powerful technical analysis tool that provides traders with a unique perspective and effective trading signals. Traders understand the principles, calculation methods, application scenarios, and limitations of DEMA and use it reasonably in combination with their own style and market environment, which is helpful to grasp opportunities, reduce risks, and improve transaction success rate and profitability. However, no technical indicator is omnipotent, and combining DEMA with other analytical methods can make more profitable investments. We also recommend that you choose broker DEMA, which provides the following tool support. Here are some of the best brokers you can use for DEMA trading indicators: