Double Exponential Moving Averages Explained

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, or DEMA, provides a solution by calculating a faster averaging methodology.

In technical analysis, the term moving average refers to an average 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 days, a 200-day moving average calculates the average price of the last 200 days, and so on. Each day, the look-back period advances to base calculations on the last X number of days.

Key Takeaways

• A moving average is an average of the price for a particular trading instrument over a specified time period.
• The most common moving averages traders and investors use are the 10-day, 20-day, 50-day, 100-day, and 200-day.
• The double exponential moving average (DEMA), which reduces lag time, is another important indicator.
• Nearly all trading platforms include moving average indicators that can be added to charts.

History of the Double Exponential Moving Average

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 described as 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 issue of the magazine Technical Analysis of Stocks & Commodities in Mulloy’s article “Smoothing Data with Faster Moving Averages.”

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 it 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.

Note

When using technical analysis, it is advised to use multiple indicators to gain accuracy on price trend predictions.

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)

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 $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.

Trading With a DEMA

The above moving average crossover examples illustrate the effectiveness of using the faster DEMA. 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 in which the logic is based on a moving average.

Technical analysis tools such as 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.

What Is a Double Exponential Moving Average?

A double exponential moving average (DEMA) is a moving average technical analysis indicator that puts more weight on recent price data by combining two exponential moving averages in order to generate a smoother and more responsive indicator. DEMAs stand in contrast to simple moving averages in that they reduce lag allowing for a quicker reaction to price changes. Technical traders utilize DEMAs to identify trends and reversals.

What Is the Difference Between Exponential and Double Exponential Moving Averages?

Exponential moving averages (EMAs) give more weight to recent prices, making them more responsive to new data. They smooth data exponentially, reducing the effect of older prices. Double exponential moving averages (DEMAs) on the other hand, combine two EMAs, reducing lag more effectively. One EMA is for the original data and the other is for the first EMA. This makes DEMAs more responsive to price changes than EMAs.

What Is a Good Exponential Moving Average?

A “good ” exponential moving average (EMA) will depend on the specific trader’s goals and trading style. Day traders use short-term EMAs, between nine and 21 days, given the exact trading style. Long-term investors will use EMAs between 50 and 200 days. Medium-term traders will use EMAs somewhere between 21 and 50 days.

The 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 DEMA 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.