What Is a Double Exponential Moving Average (DEMA)?

What Is a Double Exponential Moving Average (DEMA)?

Let me explain what a double exponential moving average, or DEMA, really is. It's a technical indicator I use to cut down on the lag you see in traditional moving averages. As a trader, you'll find it helpful for reducing the 'noise' that messes up price chart movements.

Just like any moving average, the DEMA shows you the trend in a stock or asset's price. Track the price over time, and you can spot an uptrend when it moves above the average, or a downtrend when it dips below. A price crossing the average might signal a lasting trend change.

As the name suggests, DEMA relies on two exponential moving averages (EMAs) to eliminate that lag in your charts. This approach was first introduced by Patrick Mulloy in his 1994 article 'Smoothing Data With Faster Moving Averages' in Technical Analysis of Stocks & Commodities magazine.

The Formula for the Double Exponential Moving Average

Here's the formula you need for DEMA: DEMA = 2 × EMA_N - EMA of EMA_N, where N is the look-back period. It's straightforward once you break it down.

How to Calculate the Double Exponential Moving Average

Calculating DEMA involves just four steps. First, pick your lookback period—say, five, 15, or 100 periods. Then, calculate the EMA for that period; that's EMA(n). Next, apply another EMA with the same period to that EMA(n) to get a smoothed version. Finally, multiply EMA(n) by two and subtract the smoothed EMA. That's it—you've got your DEMA.

What Does the Double Exponential Moving Average Tell You?

Even though it's called a double exponential moving average, the equation doesn't use a double exponential factor. Instead, it doubles the EMA and subtracts a smoothed EMA to cancel out lag.

Because of this setup, DEMA needs more data than a regular EMA, but your spreadsheet or charting software can handle it easily.

You'll find DEMA most useful if you're a day trader or swing trader, as it reacts faster than traditional averages. Long-term investors might stick with standard moving averages instead.

Who Uses DEMAs and Why

DEMAs react quicker than traditional moving averages, so day traders and swing traders like me use them more often. If you're a long-term investor who trades less, a standard moving average might suit you better.

We use DEMAs to spot upward or downward trends in price and gauge their strength. Watch for the price to cross above or below the DEMA. Some of us plot multiple DEMAs with different periods and look for crosses between them.

DEMA can also indicate support or resistance levels, helping you see where a trend might pause or reverse.

How to Read the DEMA

Reading the DEMA is simple. If the asset's price is above the DEMA and it's rising, that confirms an uptrend. If the price is below and the DEMA is falling, it's a downtrend.

Some traders, including myself, use two or more DEMAs with different look-back periods on one chart. A cross could signal a trade—for example, buy when a 20-period DEMA crosses above a 50-period, or sell when it crosses back below.

DEMA might not be as reliable for support and resistance. Check if it's worked that way in the past before relying on it.

Double Exponential Moving Average (DEMA) and the Triple Exponential Moving Average (TEMA)

DEMA includes the EMA of an EMA, as the name implies. The triple EMA, or TEMA, goes further with an EMA of an EMA of an EMA, reducing lag even more than DEMA.

Remember, a longer tracking period makes DEMA or any moving average more reliable by cutting down market noise.

Limitations of the Double Exponential Moving Average

Moving averages like DEMA offer little help in choppy or range-bound markets where no clear trend exists. The price will just cross the DEMA repeatedly.

DEMA's strength in reducing lag can sometimes be a weakness, leading to quick exits that minimize losses but also to overtrading from too many signals. You might sell on a minor move and miss a bigger trend.

I recommend using DEMA with other tools, like price action or fundamental analysis.

What Is the Difference Between a Simple Moving Average and DEMA?

Think of DEMA as a smoothed simple moving average. Standard ones lag more as the period lengthens, but DEMA keeps that lag consistent and gives earlier warnings of price direction changes.

What Is the Most Accurate Moving Average?

Accuracy depends on the period length. Common ones are 50-day, 100-day, and 200-day averages. Longer terms are historically more accurate since they reduce the impact of daily noise and let trends emerge clearly.

How Do You Use a Double Exponential Moving Average?

Use DEMA like any moving average to trigger buy or sell signals based on sustained price changes upward or downward.

What Is MACD DEMA?

MACD, or moving average convergence/divergence, adds insight to moving averages by showing price momentum. Calculate it by subtracting the 26-period EMA from the 12-period EMA. It helps determine if a trend is strengthening or weakening. Some traders pair it with DEMA instead of a standard average.