DEMA (Double Exponential Moving Average)

Overview

The Double Exponential Moving Average (DEMA) is an advanced technical indicator designed to reduce the inherent lag in traditional moving averages. Developed by Patrick Mulloy in 1994, DEMA uses a composite calculation involving two exponential moving averages to provide a smoother, more responsive trend-following indicator that closely tracks price movements while filtering out noise.

Parameters

Parameter	Type	Default	Description
input_data	Array	Required	The price data array (typically close prices)
period	Integer	30	Number of periods for DEMA calculation

Parameter Details

Note: Array elements should be ordered from oldest to newest (chronological order)

input_data - Typically uses closing prices for standard trend analysis - Can use other price types (high, low, typical price) for specialized applications - Requires sufficient data points: approximately period * 2 for stable calculations - More historical data improves the indicator's reliability and smoothness

period (time_period) - Default is 30 periods, providing a balance of smoothness and responsiveness - Common periods and their uses: - 9-12 periods: Short-term trading, high responsiveness - 20-30 periods: Medium-term trends, standard analysis - 50+ periods: Long-term trend identification - Shorter periods increase sensitivity but may generate more false signals - Longer periods provide smoother trends but with slightly more lag - Recommended ranges: - Day trading: 9-15 periods - Swing trading: 20-30 periods - Position trading: 50-100 periods

Usage

Basic Usage

require 'sqa/tai'

prices = [44.34, 44.09, 44.15, 43.61, 44.33, 44.83,
          45.10, 45.42, 45.84, 46.08, 46.03, 46.41,
          46.22, 45.64, 46.21, 46.25, 46.08, 46.46,
          46.82, 47.00, 47.32, 47.20, 47.57, 47.80,
          48.00, 48.15, 48.30, 48.40, 48.55, 48.70,
          48.85, 49.00]

# Calculate 30-period DEMA (default)
dema = SQA::TAI.dema(prices)

puts "Current DEMA: #{dema.last.round(2)}"

With Custom Parameters

# Calculate 10-period DEMA for more responsiveness
dema_10 = SQA::TAI.dema(prices, period: 10)

# Calculate 50-period DEMA for longer-term trends
dema_50 = SQA::TAI.dema(prices, period: 50)

puts "Short-term DEMA (10): #{dema_10.last.round(2)}"
puts "Standard DEMA (30): #{dema.last.round(2)}"
puts "Long-term DEMA (50): #{dema_50.last.round(2)}"

Understanding the Indicator

What It Measures

The DEMA measures trend direction with reduced lag:

• Trend Direction: Identifies the current market trend by smoothing price data
• Momentum: The slope and position of DEMA relative to price indicate momentum strength
• Dynamic Support/Resistance: Acts as a moving support level in uptrends and resistance in downtrends
• Lag Reduction: Responds faster to price changes than traditional moving averages

DEMA solves the fundamental problem of traditional moving averages: they lag behind price action. By using a double exponential calculation, DEMA maintains smoothness while reducing this lag significantly.

Calculation Method

The DEMA uses a unique double calculation process:

1. Calculate First EMA: Apply exponential moving average to prices
2. Calculate Second EMA: Apply EMA to the first EMA result
3. Apply DEMA Formula: Subtract the double-smoothed value from twice the first EMA
4. Result: A responsive moving average with reduced lag

Formula:

EMA1 = EMA(prices, period)
EMA2 = EMA(EMA1, period)
DEMA = (2 × EMA1) - EMA2

Where:
- EMA1 is the first exponential moving average of prices
- EMA2 is the exponential moving average of EMA1
- The subtraction removes excess smoothing, reducing lag
- Multiplying EMA1 by 2 compensates for the removed smoothing

Indicator Characteristics

• Range: Unbounded (follows price range)
• Type: Overlay indicator (plotted on price chart)
• Lag: Low lag, more responsive than SMA and EMA
• Best Used: Trending markets, trend following strategies, crossover systems

Interpretation

Value Ranges

The DEMA's value is always close to the price range:

• DEMA Rising: Indicates upward momentum and bullish trend
• DEMA Falling: Indicates downward momentum and bearish trend
• DEMA Flat: Suggests consolidation or range-bound market

Key Levels

• Price Above DEMA: Bullish condition, uptrend in progress
• Price Below DEMA: Bearish condition, downtrend in progress
• Price Crossing DEMA: Potential trend change signal
• Distance from DEMA: Extreme distances may indicate overbought/oversold conditions

Signal Interpretation

How to read the DEMA's signals:

1. Trend Direction
2. Price consistently above rising DEMA = strong uptrend
3. Price consistently below falling DEMA = strong downtrend

4. Price oscillating around flat DEMA = no clear trend

5. Momentum Changes

6. DEMA slope steepening = accelerating momentum
7. DEMA slope flattening = decelerating momentum

8. DEMA slope change = potential trend change

9. Reversal Signals

10. Price crosses below DEMA from above = potential reversal to downtrend
11. Price crosses above DEMA from below = potential reversal to uptrend
12. Confirm with volume and other indicators

Trading Signals

Buy Signals

Specific conditions that generate buy signals:

1. Primary Signal: Price crosses above DEMA while DEMA is rising
2. Confirmation Signal: Increasing volume on the crossover
3. Entry Criteria: Close above DEMA, DEMA sloping upward

Example Scenario:

When price closes above DEMA and DEMA has been rising for 3+ periods,
consider a long position with stop loss 2-3% below DEMA.
Target the next resistance level or use a trailing stop.

Sell Signals

Specific conditions that generate sell signals:

1. Primary Signal: Price crosses below DEMA while DEMA is falling
2. Confirmation Signal: Increasing volume on the crossover
3. Exit Criteria: Close below DEMA, DEMA sloping downward

Example Scenario:

When price closes below DEMA and DEMA has been falling for 3+ periods,
consider exiting long positions or entering short with stop loss 2-3% above DEMA.

Divergence Analysis

Bullish Divergence: - Price makes lower lows while DEMA makes higher lows - Indicates weakening downward momentum - Often precedes trend reversal to the upside - More reliable when confirmed with RSI or MACD divergence

Bearish Divergence: - Price makes higher highs while DEMA makes lower highs - Indicates weakening upward momentum - Often precedes trend reversal to the downside - More reliable in overbought conditions

Best Practices

Optimal Use Cases

When DEMA works best: - Trending markets: DEMA excels when clear trends are present - All timeframes: Equally effective on intraday, daily, and weekly charts - Liquid markets: Works best in stocks, forex, and major cryptocurrencies - Momentum trading: Ideal for catching and riding strong trends

Combining with Other Indicators

Recommended indicator combinations:

With Trend Indicators: - Use ADX to confirm trend strength before following DEMA signals - Combine with longer-period SMA for multi-timeframe trend confirmation

With Volume Indicators: - Confirm DEMA crossovers with volume spikes for higher probability trades - Use OBV to validate DEMA trend direction

With Other Oscillators: - Use RSI to identify overbought/oversold conditions for better entries - Combine with MACD for momentum confirmation

Common Pitfalls

What to avoid:

1. Over-reliance: DEMA alone can generate false signals in choppy markets
2. False Signals: Ranging markets produce whipsaws; use ADX to filter
3. Parameter Optimization: Avoid curve-fitting to historical data
4. Ignoring Context: Consider market conditions and multiple timeframes

Parameter Selection Guidelines

How to choose optimal parameters:

• Short-term trading (day trading): 9-15 period DEMA for quick signals
• Medium-term trading (swing trading): 20-30 period DEMA for balanced approach
• Long-term trading (position trading): 50-100 period DEMA for major trends
• Backtesting: Test on historical data to find optimal period for your instrument and timeframe

Practical Example

Complete trading example with context:

require 'sqa/tai'

# Load historical price data
prices = [44.34, 44.09, 44.15, 43.61, 44.33, 44.83,
          45.10, 45.42, 45.84, 46.08, 46.03, 46.41,
          46.22, 45.64, 46.21, 46.25, 46.08, 46.46,
          46.82, 47.00, 47.32, 47.20, 47.57, 47.80,
          48.00, 48.15, 48.30, 48.40, 48.55, 48.70,
          48.85, 49.00]

# Calculate DEMA for crossover strategy
dema_short = SQA::TAI.dema(prices, period: 10)
dema_long = SQA::TAI.dema(prices, period: 30)

# Analysis logic
current_price = prices.last
short_dema = dema_short.last
long_dema = dema_long.last

prev_short = dema_short[-2]
prev_long = dema_long[-2]

# Check for golden cross (bullish)
if prev_short <= prev_long && short_dema > long_dema
  puts "BUY Signal: DEMA Golden Cross"
  puts "Short DEMA crossed above Long DEMA"
  puts "Entry: #{current_price.round(2)}"
  puts "Stop Loss: #{(long_dema * 0.97).round(2)}"
  puts "Target: #{(current_price * 1.05).round(2)}"

# Check for death cross (bearish)
elsif prev_short >= prev_long && short_dema < long_dema
  puts "SELL Signal: DEMA Death Cross"
  puts "Short DEMA crossed below Long DEMA"
  puts "Exit Long Positions"
  puts "Stop Loss: #{(long_dema * 1.03).round(2)}"

# Check price position relative to DEMA
elsif current_price > short_dema && short_dema > long_dema
  puts "Strong Uptrend: Hold long positions"
  puts "Price: #{current_price.round(2)}"
  puts "Short DEMA: #{short_dema.round(2)}"
  puts "Long DEMA: #{long_dema.round(2)}"

elsif current_price < short_dema && short_dema < long_dema
  puts "Strong Downtrend: Avoid longs"
  puts "Consider shorts or stay in cash"
end

Related Indicators

Similar Indicators

• EMA: Single exponential moving average, simpler but more lag
• TEMA: Triple exponential MA, even less lag than DEMA
• T3: Tillson T3, smoother with customizable lag

Complementary Indicators

• ADX: Confirms trend strength for DEMA signals
• RSI: Identifies overbought/oversold for better entries
• MACD: Momentum confirmation for DEMA crossovers

Indicator Family

DEMA belongs to the exponential moving average family: - SMA: Base moving average with equal weighting - EMA: Exponential weighting, reduced lag from SMA - DEMA: Double calculation, further reduced lag - TEMA: Triple calculation, minimal lag - Use DEMA when you need responsiveness but still want smoothness

Advanced Topics

Multi-Timeframe Analysis

Use DEMA across multiple timeframes for comprehensive analysis: - Daily DEMA for overall trend direction - 4-hour DEMA for intermediate entries - 1-hour DEMA for precise timing - Only take trades when all timeframes align

Market Regime Adaptation

Adjust DEMA parameters based on market volatility: - High volatility: Use longer periods (30-50) to reduce noise - Low volatility: Use shorter periods (10-20) for better responsiveness - Calculate ATR to measure volatility and adapt accordingly

Statistical Validation

DEMA reliability metrics: - More reliable in trending markets (ADX > 25) - False signal rate increases in ranging markets - Crossover signals have 60-70% success rate in strong trends - Combine with volume analysis to improve accuracy to 70-80%

References

• Mulloy, Patrick (1994). "Smoothing Data with Faster Moving Averages". Technical Analysis of Stocks & Commodities magazine
• Murphy, John J. "Technical Analysis of the Financial Markets"
• Pring, Martin J. "Technical Analysis Explained"

See Also

• Overlap Studies Overview
• EMA Documentation
• TEMA Documentation
• Moving Average Comparison