Trading Indicator Toolbox – DEMA
The original Analysis Toolbox articles discussed the various market cycles including trends and continuations. This part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. This week its the turn of the DEMA trading indicator(for a free 2-week trial CLICK HERE)
DEMA Trading Indicator
DEMA stands for Double Exponential Moving Average, and is a calculation based on both a single exponential moving average and a double exponential moving average.
In general, the EMA gives more weight to recent price data than the SMA. This implies that the EMA will follow the more recent price action more closely than the SMA. The more reactive, the quicker the change in trend.
The DEMA trding indicator calculation reduces the lag even more and the calculation is as follows:
DEMA = (2*EMA(n)) – (EMA(EMA(n))), where n = period
The main purpose of the moving average is to smooth out the price fluctuations and reduce the noise to a certain extent so that the trend becomes clear. However, smoothing creates a lag which results in later signals. DEMA allows achieving a smaller lag for the same amount of smoothing.
In the NAS100 hourly chart below, the SMA is plotted in red, the EMA in blue, and the DEMA in black. Take note of how the DEMA follows price more closely than the EMA and SMA. Also, the DEMA turns first with the trend (less lag), followed by the EMA and SMA.
USING THE DEMA Trading Indicator
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