What is Double Exponential Moving Average - DEMA
Double Exponential Moving Average - DEMA is a technical indicator used to analyze and predict movement of share prices of securities. IPatrick Mulloy first introduced DEMA in his article "Smoothing Data With Faster Moving Averages" in the January 1994 issue of Technical Analysis of Stocks & Commodities magazine.
DEMAs use multiple exponential moving averages (EMAs) to eliminate lag when predicting prices for stocks, bond yields, futures and other market charts using moving averages.
BREAKING DOWN Double Exponential Moving Average - DEMA
The Double Exponential Moving Average - DEMA indicator is one of many technical indicators using the exponential moving average (EMA) of a stock price to analyze and predict future price movements. Since Pete Haurlan introduced EMAs to analyze charts in the 1960s, numerous analysts and investors adopted their own various ways to use EMAs to explain and predict market movements. In 1994, Patrick Mulloy developed an equation to use EMAs to capture short-term market movments without the lag inherent in other EMA-based indicators. His idea was that if you calculated a faster average that accounted for the lag, you wouldn't need to rely on smoothing factors to predict returns.
Although the indicator is called Double Exponential Moving Average, the equation does not rely on using a double exponential smoothing factor. Instead, the equation doubles the EMA, but then cancels out the lag by subtracting the square of the EMA. Because of the complication of the equation, DEMA calculations require more data versus straight EMA calculations. However, modern spreadsheets and technical-charting packages easily calculate DEMAs.
DEMAs can be used on their own as technical indicators to make predictions, and also can be used with a variety of other indicators and concepts, such as support and resistance, Fibonacci retracements, oscillators and commonly used technical patterns.
Introduction of EMA as a Chart Analysis Tool
Rocket scientist Pete Haurlan initially used the exponential moving average (EMA), a concept from propulsion science calculations, to predict movement of stock prices in his Haurlan Index developed in the 1960s in his trading newsletter Trade Levels.
Haurlan used the EMA calculation to look at changes in prices while "smoothing" the changes over a period of time of days or months so that abrupt jumps or falls wouldn't skew the results and lead to false predictions. Haurlan used a computer to do the calculations, and Trade Levels introduced the idea of computer-facilitated calculations of technical indicators to traders and investors.
Haurlan's introduction of computer calculations for analysis and using EMA to smooth out trends began a new school of thought of chart analysis, and many analysts later developed their own indicators using EMA.
DEMA is one of these technical indicators that expanded on Haurlan's work.