The meaning and practical application of the DEMA indicator

In order to create an effective trading system, it is necessary to determine with a high probability the moment that is most favorable for entering a trade. For this purpose, the simultaneous fulfillment of two conditions is used:

1. A trend has been determined, in accordance with which the price is changing now.
2. A situation arises in which it is possible to enter a trade in the direction of the trend with a small stop and a good potential profit.

One of the traditional ways to determine the trend is to use the average values ​​of a certain number of bars (candlesticks on the chart). For example, an increase in the average (SMA) of the last 24 values ​​on an hourly chart shows the direction in which the chart has changed over the past 24 hours. The main disadvantage of such an indicator is its delay. Thus, a trader, based on his signals, can easily miss the moment that is favorable for entering into a transaction. Technical analysis tools are constantly evolving and, in particular, this has led to the emergence of a special method for calculating averages – EMA. Its difference lies in the fact that when calculating the average, the values ​​​​are taken with certain weights, and the latter will have more. Thus, the average will show the presence of a trend, but its delay will be less compared to the usual average. The DEMA indicator is a further development of this idea. In this case, first, the EMA is taken from the asset price, and then from the obtained EMA values, it is taken again.

The name of the indicator stands for Double EMA (DEMA) aka Double Exponential Moving Average (double exponential moving average).

The resulting indicator has the minimum delay among similar indicators. Illustration of how different types of averages work
Thus, DEMA can be used both to determine the trend and to find the most profitable moment of the transaction. This is largely due to its minimal delay.

Practical use

The Double Exponential Moving Average can be used directly, but it is more commonly used as follows:

1. EMA is calculated from asset price values.
2. Calculate DEMA from this indicator.
3. Indicator = ( 2 x EMA ) – DEMA.

This average can also be used in other ways. Using DEMA allows you to determine the presence of a trend change in price. If the latter is above the indicator, then the trend is up; if it is below, then it is down. This method allows you to objectively evaluate the trend, but the trader needs to choose the order of the average used.
This average during a trend movement can be considered a dynamic resistance line (if the price chart is lower) or support (if it is lower). Such a curve can be used to open a trade on a rebound. The intersection of a dynamic line can also be considered as a signal to exit a trade opened with a trend. DEMA can be used as a signal to enter a trade. If, for example, the price crosses the indicator from the bottom up, then you can open a deal to buy the asset. You can use a combination of 2 DEMA with different periods. For example, you can choose 21 for short, and 50 for long. The trader must determine the exact value based on the trading strategy he uses. A slower indicator can be used as a way to determine the trend, and the intersection of short and long as a favorable moment to open a deal.

When using DEMA, you need to take actions based on a trading strategy. That is, this signal should not be considered in isolation from other rules of the trading system. An example is the following situation. Suppose the price is moving in an uptrend within a corridor. If it breaks the lower sloping support line and the DEMA indicator works in the same direction at the same time, then we can assume that the probability of a successful short trade will increase. Trade example:

How to use DEMA and how to set it up

To use the DEMA indicator, you must select a period for it. It determines the number of last bars by which it is calculated.
Usually, when working on different time intervals, the trader chooses the number that he considers the most effective. For example, some people think that for hourly charts it is better to take a period of 24. If you plan to use this indicator, you should take into account that it is not among the standard ones. The installation procedure depends on the terminal you are using. For example, the popular Metatrader 4 application provides for a certain number of custom indicators. You can download DEMA, for example, from the link http://fox-trader.ru/wp-content/uploads/2015/09/DEMA.zip. To use it, you need to take the following steps:

1. First, the resulting archive must be unpacked.
2. You need to launch Metatrader 4, then open MetaEditor.
3. In the main menu, go to “File”, then click on “Open”.
4. Select the unpacked DEMA indicator file and open it.
5. Then click on the “Save as” line. After that, the file will be saved in the indicators directory.
6. Then in Metatrader go to the “View” menu and open the navigator. In the indicator catalog, double-click on DEMA.
7. After that, it appears on the chart.

The file downloaded from the link provided here also contains the DEMA MACD indicator. It is installed as described here. The use of the indicator is explained in the attached figure. Using the DEMA MACD:
The chart additionally provides a comparison with the classic MACD. It can be seen that the option that uses DEMA gives more accurate signals. Types of moving averages (SMA, WMA, EMA, DEMA, TEMA): https://youtu.be/2fzwZAScEDc

Difference from related indicators

When using DEMA, the question arises as to whether it is worth further reducing the delay of the indicator by taking EMA from this indicator again (the indicator obtained in this way is called TEMA). At the same time, it should be understood that a relatively slower change in the average helps to more accurately determine the direction of the trend change.
If you increase the sensitivity of the average, then it will display the current price changes to a greater extent compared to the display of the trend. At the same time, the use of the indicator will become more profitable in short-term trading. Compared to a simple or exponential average, the DEMA indicator has less lag and gives more accurate signals.