Double exponential moving average, or DEMA, is a measure of a security's trending average price that gives the most weight to recent price data. Like exponential moving average, or EMA, it is more reactive to price fluctuations than a simple moving average, or SMA, thereby bringing more value to short-term traders attempting to pinpoint trend changes. Moving averages are by nature lagging indicators, so the more reactive, the more lead time a trader has to react. Though its name implies that DEMA is simply calculated by doubling the EMA, this is not the case. The formula for DEMA is:
DEMA = ( 2 * EMA(n)) - (EMA(EMA(n)) ), where n= period
The first step to calculating DEMA is to calculate the EMA. Then, run an EMA calculation again, using the result of the first EMA calculation (EMA(n) as a function of the equation EMA(x) ). Finally, subtract the result from the product of 2 * EMA(n).
Creating a moving average of the security's moving average more effectively cancels out the noise, or fluctuations. Then, doubling the EMA increases the magnitude of the line, meaning peaks are sharper and valleys deeper. Thus, the DEMA still reflects a moving average while keeping pace with current, daily changes. Traders commonly utilize this tool to confirm what they see as reversal signals. For example, if DEMA (50) and DEMA (200) create a death cross amid increased selling pressure, the trader can confirm the price is likely entering a bearish trend. Meanwhile, if short-lived, the bearish trend may already be reversing by the time the EMA and SMA catch up. Therefore, DEMA is well-suited for short-term trend indications.