What is Double Exponential Moving Average?
The Double Exponential Moving Average is a technical indicator which uses two exponential moving averages (EMAs) to eliminate lag, as some traders view lag as a problem.
The DEMA strategy is used in a similar way to traditional moving averages (MA).
The Double Exponential Moving Average strategy can be used in the same way as other MAs, as long as the trader understands the indicator will react quicker than traditional MAs.
The Double EMA indicator confirms uptrends if the price reaches above average, and downtrends when it reaches below average. When the average is crossed, a trend change may be signaled. Areas of support or resistance are also indicated using moving averages.
How to Calculate Double Exponential Moving Average?
The Double Exponential Moving Average (DEMA) formula Is:
DEMA = (2*ema(data, period) – ema(ema(data, period), period)
To calculate the Double Exponential Moving Average,
- Choose a lookback period
- Calculate the Exponential Moving Average (EMA) for that period, EMA(period).
- Apply an Exponential Moving Average with the same lookback period to EMA(period). This renders a smoothed EMA.
- Double the EMA(period) and subtract the smoothed EMA.
How and why use DEMA?
The double exponential moving average helps confirm uptrends when the price is above it and helps confirm downtrends when the price is below it. When the price crosses the average that may signal a trend change. The DEMA responds quicker to price changes than a normal exponential moving average.
The double EMA indicator can be used as a stand-alone indicator and can be incorporated into other technical analysis tools whose logic is based on moving averages.
DEMA trading strategy can also be used to analyze the strength of an uptrend or downtrend in price.
- When the price moves above the DEMA from below that could signal the downtrend is over and the price is starting to rise. Hence one can go long if the price crosses above the DEMA.
- When the price moves below the DEMA from above that could signal the uptrend is over and the price is starting to fall. Hence one can go short if the price crosses below the DEMA.
Building DEMA Strategy on Mudrex:
As discussed above, lets first write our entry/exit conditions so that we know what to do:
BUY: When price crosses up DEMA.
SELL: When price crosses below DEMA.
Final Strategy: The final strategy on Mudrex looks like this
We can now run a quick back-test to see how our strategy performs.