Traders have relied on moving averages to help pinpoint high probability trading entry points and profitable exits for many years. A well-known problem with moving averages, however, is the serious lag that is present in most types of moving averages. The double exponential moving average (DEMA) provides a solution by calculating a faster averaging methodology.

Tutorial: Moving Averages

History of the Double Exponential Moving Average
In technical analysis, the term moving average refers to an average of price for a particular trading instrument over a specified time period. For example, a 10-day moving average calculates the average price of a specific instrument over the past 10 ten days; a 200-day moving average calculates the average price of the last 200 days. Each day, the look-back period advances to base calculations on the last X number of days. A moving average appears as a smooth, curving line that provides a visual representation of the longer-term trend of an instrument. Faster moving averages, with shorter look-back periods, are choppier; slower moving averages, with longer look-back periods, are smoother. Because a moving average is a backward looking indicator, it is lagging.

The double exponential moving average (DEMA), shown in Figure 1, was developed by Patrick Mulloy in an attempt to reduce the amount of lag time found in traditional moving averages. It was first introduced in the February 1994, Technical Analysis of Stocks & Commodities magazine in Mulloy's article "Smoothing Data with Faster Moving Averages". (For a primer on technical analysis, take a look at our Technical Analysis Tutorial.)

Figure 1: This one-minute chart of the e-mini Russell 2000 futures contract shows two different double exponential moving averages; a 55-period appears in blue, a 21-period in pink.
Source: Tradestation

Calculating a DEMA
As Mulloy explains in his original article, "the DEMA is not just a double EMA with twice the lag time of a single EMA, but is a composite implementation of single and double EMAs producing another EMA with less lag than either of the original two."

In other words, the DEMA is not simply two EMAs combined, or a moving average of a moving average, but is a calculation of both single and double EMAs.

Nearly all trading analysis platforms have the DEMA included as an indicator that can be added to charts. Therefore, traders can use the DEMA without knowing the math behind the calculations and without having to write or input any code.

Comparing the DEMA with Traditional Moving Averages
Moving averages are one of the most popular methods of technical analysis. Many traders use them to spot trend reversals, especially in a moving average crossover, where two moving averages of different lengths are placed on a chart. Points where the moving averages cross can signify buying or selling opportunities.

The DEMA can help traders spot reversals sooner because it is faster to respond to changes in market activity. Figure 2 shows an example of the e-mini Russell 2000 futures contract. This one minute chart has four moving averages applied:

  • 21-period DEMA (pink)
  • 55-period DEMA (dark blue)
  • 21-period MA (light blue)
  • 55-period MA (light green)
Figure 2: This one-minute chart of the e-mini Russell 2000 futures contract illustrates the faster response time of the DEMA when used in a crossover. Notice how the DEMA crossover in both instances appears significantly sooner than the MA crossovers.
Source: Tradestation

The first DEMA crossover appears at 12:29 and the next bar opens at a price of $663.20. The MA crossover, on the other hand, forms at 12:34 and the next bar's opening price is at $660.50. In the next set of crossovers, the DEMA crossover appears at 1:33 and the next bar opens at $658. The MA, in contrast, forms at 1:43, with the next bar opening at $662.90. In each instance, the DEMA crossover provides an advantage in getting into the trend earlier than the MA crossover. (For more insight, read the Moving Averages Tutorial.)

Trading With a DEMA
The above moving average crossover examples illustrate the effectiveness of using the faster double exponential moving average. In addition to using the DEMA as a standalone indicator or in a crossover setup, the DEMA can be used in a variety of indicators where the logic is based on a moving average. Technical analysis tools such as Bollinger Bands®, moving average convergence/divergence (MACD) and triple exponential moving average (TRIX) are based on moving average types and can be modified to incorporate a DEMA in place of other more traditional types of moving averages.

Substituting the DEMA can help traders spot different buying and selling opportunities that are ahead of those provided by the MAs or EMAs traditionally used in these indicators. Of course getting into a trend sooner rather than later typically leads to higher profits. Figure 2 illustrates this principle - if we were to use the crossovers as buy and sell signals, we would enter the trades significantly earlier when using the DEMA crossover as opposed to the MA crossover.

Bottom Line
Traders and investors have long used moving averages in their market analysis. Moving averages are a widely used technical analysis tool that provides a means of quickly viewing and interpreting the longer term trend of a given trading instrument. Since moving averages by their very nature are lagging indicators, it is helpful to tweak the moving average in order to calculate a quicker, more responsive indicator. The double exponential moving average provides traders and investors a view of the longer term trend, with the added advantage of being a faster moving average with less lag time. (For related reading, take a look at Moving Average MACD Combo and Simple Vs. Exponential Moving Averages.)

Related Articles
  1. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  2. Charts & Patterns

    How To Use Volume To Improve Your Trading

    The basic guidelines to analyzing volume may not apply in all situations, but overall, they can help direct entry and exit decisions.
  3. Trading Strategies

    4 Common Active Trading Strategies

    Active trading entails buying and selling securities with the intent of profiting from short-term price movements.
  4. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  5. Chart Advisor

    These 3 ETFs Suggest Commodities Are Headed Lower (COMT,CCX,DBC)

    The charts of these three exchange traded funds suggest that commodities are stuck in a downtrend and it doesn't look like it will reverse any time soon.
  6. Chart Advisor

    3 Charts That Suggest Now Is The Time To Invest In Real Estate (VNQ, SPG,PSA)

    Real estate assets have some of the strongest uptrends around. We'll take a look at three candidates poised for a move higher.
  7. Chart Advisor

    Stocks With More Upside Due to Bear Traps (TAP, SPY)

    A bear trap is a pattern that typically leads to at least a short-term rise in prices. Here are stocks exhibiting the pattern.
  8. Term

    Swing Trading Risks and Rewards

    Swing trading is the attempt to capture gains in a stock within one to four days.
  9. Stock Analysis

    3 Risks U.S. Equities Face in 2016

    Find out why the probability of a U.S. stock bear market is increasing in 2016 and what the greatest risks are to the bull market that is almost 7 years old.
  10. Active Trading Fundamentals

    New Traders: Trade the Market in 5 Steps

    New traders shouldn’t throw money at securities without knowing why prices move. Follow these five steps to tilt the odds in your favor.
RELATED FAQS
  1. What are the differences between an Exponential Moving Average (EMA) and a Double ...

    Technical analysts and traders use moving averages to help identify trends in security prices. There are different types ... Read Full Answer >>
  2. What are common trading strategies used with the Double Exponential Moving Average ...

    Traders use moving averages to help determine when a security's price is out of range, signaling the time to make a move. ... Read Full Answer >>
  3. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  4. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  5. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  6. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center