Double Exponential Moving Average (DEMA) – What It Is & How to Trade It

Double Exponential Moving Average (DEMA) – What It Is & How to Trade It

What is the Double Exponential Moving Average (DEMA)?

The Double Exponential Moving Average (DEMA) is a modified version of the Exponential Moving Average (EMA) that reduces lag, providing traders with faster trend signals. Developed by Patrick Mulloy, DEMA helps traders react more quickly to price movements compared to traditional moving averages.

DEMA is calculated using the following formula:
DEMA = (2 × EMA(n)) – EMA(EMA(n))

Where:

• EMA(n) = Exponential Moving Average for a given period n.
• The second EMA smooths the first EMA to reduce lag.

Key Features of DEMA

• Faster trend detection than SMA and EMA.
• Reduces lag significantly, allowing quicker trade decisions.
• More responsive to price changes, making it ideal for fast-moving markets.

How to Use DEMA in Forex Trading

1. Trend Identification Strategy

• Bullish Trend: Price is above the DEMA, and the DEMA is sloping upward.
• Bearish Trend: Price is below the DEMA, and the DEMA is sloping downward.

Recommended DEMA Settings:

• Short-term traders: 10-period DEMA for quick signals.
• Swing traders: 50-period DEMA for trend confirmation.
• Long-term traders: 100-period DEMA to define major trends.

2. DEMA Crossover Strategy

Using two DEMAs with different periods helps generate trade signals:

• Buy Signal: When a short-term DEMA (e.g., 10 DEMA) crosses above a long-term DEMA (e.g., 50 DEMA).
• Sell Signal: When a short-term DEMA crosses below a long-term DEMA.

Best DEMA Combinations:

• 10 DEMA & 50 DEMA: Short-term trading.
• 20 DEMA & 50 DEMA: Swing trading.
• 50 DEMA & 200 DEMA: Long-term trend analysis.

3. DEMA with MACD Strategy

Pairing DEMA with MACD (Moving Average Convergence Divergence) improves trade confirmation:

• Buy when: DEMA indicates an uptrend & MACD crossover confirms bullish momentum.
• Sell when: DEMA indicates a downtrend & MACD crossover confirms bearish momentum.

Pros and Cons of Using DEMA

✅ Pros:

• Faster response to price action compared to EMA.
• Reduces lag, providing more accurate signals.
• Works well in trending markets.

❌ Cons:

• More sensitive to price fluctuations, which may lead to false signals.
• Not as widely used as SMA or EMA, requiring backtesting for optimization.

Final Thoughts

The Double Exponential Moving Average (DEMA) is a powerful trend-following indicator that helps traders reduce lag and improve signal accuracy. When used correctly, it can enhance trade entries and exits, making it an essential tool for forex traders.