Traders have relied on moving averages to help pinpoint high-probability trading entry points and profitable eꦇxits 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 澳洲幸运5官方开奖结果体彩网:double exponential moving average, or DEMA, provides a solution by calculating 🦩a faster averaging methodology.

In 澳洲幸运5官方开奖结果体彩网:technical analysis, 𒁃the 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 day🎐s, a 200-day moving average calculates t𒁏he 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.

History of the Double Exponential Mo🅘ving Average

A moving average appears as a smo𒈔oth, 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 average𝔉 of a moving average, but it is a calculation of both single and double EMAs.

Nearly all trading analysis platforms have the DEMA includ𝓰ed as an indicator that can be added to charts. 𒐪Therefore, traders can use the DEMA without knowing the math behind the calculations and without having to write or input any code.

Comparing the DEMA With Traditional Moving Avera🥂ges🅠

Moving averages are one of the most popular methods of technical analysis. Many traders use them to spot trend 澳洲幸运5官方开奖结果体彩网:reversals, especially in a moving average 澳洲幸运5官方开奖结果体彩网:crossover, where two moving averages of different lengths are placed on a chart. Points where♛ the moving averages croꩲss 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 澳洲幸运5官方开奖结果体彩网:futures contract. This one-minute chart has four moving ave🏅rages appl﷽ied:

• 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.

ꦡ The MA𓄧, 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 ꦡcrossover 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 澳洲幸运5官方开奖结果体彩网:moving aver🗹a𒐪ge convergence divergence (MACD) and 澳洲幸运5官方开奖结果体彩网:triple exponential moving average (TRIX)&n🅰bsp;are based on moving average types and can be modified to incorporate a DEMA in place of other more traditional t🐎ypes of moving averages.

Substituting the DEMA can help traders spot different buying and selling opportunities that are ahead of those provided by the MAs o🅘r EMAs traditionally used in these indicators. Of course, getting into a trend sooner rat✨her than later typically leads to higher profits.

Figure 2 illustrates this p💦rinciple—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 op💞posed to the MA crossover.

The Bottom Line

Traders and investors have long used moving averages in their market analysis. Movin🌠g 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 instrume♍nt.

Since moving averages by their very natur✃e 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.