What Is a Double Exponential Moving Average (DEMA)?

The double exponential moving average (DEMA) is a technical indicator devised to reduce the lag in the results produced by a traditional moving average. Technical traders use it to lessen the amount of "noise" that can distort the movements on a price chart.

Like any moving average, the DEMA is used to indicate the trend in the price of a stock or other asset. By tracking its price over time, the trader can spot an uptrend—when the price moves above its average, or a downtrend—when the price moves below its average. When the price crosses the average, it may signal a sustained change in the trend.

As its name implies, the DEMA uses two exponential moving averages (EMAs) to eliminate lag in the charts.

This variation on the moving average was introduced by Patrick Mulloy in a 1994 article "Smoothing Data With Faster Moving Averages" in Technical Analysis of Stocks & Commodities magazine.

The Formula for the Double Exponential Moving Average Is:

 $\begin{aligned} &DEMA=2\times EMA_N\ -\ EMA\text{ of }EMA_N\\ &\textbf{where:}\\ &N=\text{Look-back period} \end{aligned}$​DEMA=2×EMAN​ − EMA of EMAN​where:​

How to Calculate the Double Exponential Moving Average

There are just four steps to this calculation:

1. Choose any lookback period, such as five periods, 15 periods, or 100 periods.
2. Calculate the EMA for that period. This is EMA(n).
3. Apply an EMA with the same lookback period to EMA(n). This produces a smoothed EMA.
4. Multiply two times the EMA(n) and subtract the smoothed EMA.

What Does the Double Exponential Moving Average Tell You?

Although the indicator is called a double exponential moving average, the equation does not rely on using a double exponential smoothing factor. Instead, the equation doubles the EMA but then cancels out the lag by subtracting a smoothed EMA.

Because of the complication of the equation, DEMA calculations require more data than straight exponential moving average (EMA) calculations. However, spreadsheets and technical charting software can easily calculate DEMAs.

Who Uses DEMAs and Why

DEMAs react quicker than traditional moving averages, so their users are more likely to be day traders or swing traders. Long-term investors, who trade less frequently, may find that a traditional moving average works better for them.

DEMAs are used primarily to spot an upward or downward trend in price and analyze its strength. Traders watch for a price to move above or below the DEMA. Some use multiple DEMAs with different lookback periods, watching for the DEMAs to cross each other.

Like any moving average, a DEMA also can be used to indicate price support or resistance. That is, it can help identify the price point at which a trend will pause or even reverse.

How to Read the DEMA

Reading the DEMA is straightforward. When the price of an asset is above the DEMA, and the DEMA is rising, it helps confirm an uptrend in price. When the price is below the DEMA, and the DEMA is falling, that helps confirm a downtrend.

As noted above, some traders display two or more DEMAs with different look-back periods on a single chart. Trade signals could be generated when these lines cross.

For example, a trader may buy if a 20-period DEMA crosses above a 50-period DEMA, or sell when the 20-period crosses back below the 50-period. The DEMA may be less reliable when used to indicate potential support and resistance price points. A trader viewing a DEMA, or any moving average, to pinpoint potential support or resistance points should make sure that it has served this function in the past. If not, it likely won't in the future.

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

As the names imply, the double EMA includes the EMA of an EMA. The triple EMA (TEMA) has an even more complex calculation, involving an EMA of an EMA of an EMA.

The goal is still to reduce lag, and the triple EMA has even less lag than the double EMA.

Limitations of the Double Exponential Moving Average

Moving averages can provide little or no insight during times when the price of an asset is choppy or range-bound. No reliable trend can be identified at such times. The price will frequently cross back and forth across the DEMA.

In addition, the strength of the DEMA is its ability to reduce lag, but that can be its weakness in some circumstances.

The reduced lag gets the trader out quicker, reducing losses. Yet reduced lag can also encourage overtrading by providing too many signals. The indicator may tell a trader to sell when the price makes a minor move, thus missing out on a greater opportunity if the trend continues.

The DEMA is best used in conjunction with other forms of analysis, such as price action analysis and fundamental analysis.