Double Exponential Moving Average (DEMA)
Double Exponential Moving Average (DEMA) is a smoother and faster Moving average developed with the purpose of reducing the lag time found in traditional moving averages.
DEMA was first time introduced in 1994, in the article "Smoothing Data with Faster Moving Averages" by Patrick G. Mulloy in "Technical Analysis of Stocks & Commodities" magazine.
In this article Mulloy says:
"Moving averages have a detrimental lag time that increases as the moving average length increases. The solution is a modified version of exponential smoothing with less lag time.."
DEMA indicator formula
DEMA default period (t) = 21.
DEMA is not just a double EMA.
DEMA is also not a moving average of a moving average.
It's a combination of a single + double EMA for a lesser lag than either of the original two.
How to trade with DEMA
DEMA can be used instead of traditional moving averages or the formula can be applied to smooth out price data for other indicators, which are based on moving averages.
DEMA can help to spot price reversals faster, comparing to regular EMA.
Such popular trading method as Moving average crossover, will gain a new meaning with DEMA.
Let's compare 2 EMA crossover vs 2 DEMA crossover signals.
DEMA MACD for MT4
Some of Mulloy's original testing of DEMA indicator was done on the MACD, where he discovered that the DEMA-smoothed MACD was faster to respond, and despite producing fewer signals, gave higher results than the regular MACD.
Besides MACD, DEMA smoothing method can be applied to various indicators.
Patrick G. Mulloy says:
"..Implementing this faster version of the EMA in indicators such as the moving average convergence/divergence (MACD), Bollinger bands or TRIX can provide different buy/sell signals that are ahead (that is, lead) and respond faster than those provided by the single EMA.."
Another smoothing method developed by Mulloy is known as TEMA, which is a Triple Exponential Moving Average or, yet another Triple EMA version, developed by Jack Hutson - TRIX indicator.
The indicator is showing relative actual strength of currency XXX. The indicator calculates its value of close prices of 7 pairs containing currency XXX. The indicator can be used for MEAN REVERSION based strategies. Lets assume XXX YYY currency pair scheme where XXX is BASE currency and YYY is QUOTEcurrency. Place Power of XXX into your chart first and Power of YYY second. You can have 2 relevant situations. Indicators curves are close to each other. It means there is higher probability that the price of the pair XXX YYY will go UP. Do not take Power of .. signals separately from overall market situation (SR levels/zones and so on). Indicators curves are FAR from each other. It means there is higher probability that the price of the pair XXX YYY will go DOWN. Do not take Power of .. signals separately from overall market situation (SR levels/zones and so on).
Elliott Wave Theory is a popular method of analysis that applies a technical approach with a fundamental analysis interpretation. Elliott Wave Theorists also concentrate on the price action strictly, and agree to the notion that the price is the beginning and end of all analysis, but they recognise that there exists an important relationship between liquidity, credit, and economic robustness which underlies the existing price patterns in the market. The Wave Theory was first proposed by Ralph Nelson Elliott, an accountant, in the 1930s. Elliott’s approach was condensed into its definitive form in his 1938 book “Nature’s Laws – The Secret of the Universe” in 1946. Since then, the theory has been regarded both as pseudo-science, and as an effective method for dealing with the uncertainties of the market. Academics tend to disregard it in general, while some famous trading personalities, such as Robert Prechter, and Paul Tudor Jones claim to have attained success by using it. Calculation The Elliott Wave Theory is based on the cyclical nature of market events. Most traders are familiar with the fact that market events, and economical conditions tend to recur in time with a varying frequency. A growth phase may be exceptionally long, or a recession (and a bear market may surprised to be exceptionally harsh and deep, but the nature of trading and economic activity ensures that sooner or later the existing conditions will revert to the opposite, and the market Trading with the Elliott Wave A wave theorist will divide the price pattern into several sub-patterns and consider trade opportunities on the basis of trends that exist at lower levels. Although Elliott Wave Theory is often discussed in the context of decades or years, the fractal nature of the price action enables the application of the theory at any timeframe. Wave theory divides price action into five main phases. At the first phase, the trend is barely obvious as only a small number of traders are aware of its emerging potential. At phase two, there is a small correction, but it never brings prices below the inception point of the trend. Phase three is the strongest and most powerful, and also drives a large number of bystanders into the price action. Phase four is the ensuing corrective phase, and phase five is the final, bubbling phase of the trend where everyone is bullish and massive amounts of capital enter the market. Phase five is followed by a collapse which ends the trend. Deciding where each of these phases begins or ends is mostly a matter of intuition. As such, there are no generally accepted methods, and each trader will sooner or later improvise his own techniques for determining the time frame of a trend. This is not necessarily a problem, since the best way of coping with the resultant failures and losses is choosing a strategy that will accommodate your risk tolerance and mental resilience in trading. Since each person is different, interpretation of Wave Theory also varies from person to person. Conclusion Advantages The main advantage of the Elliott Wave Theory lies in the organisation and compactness that it grants to the chaotic and price action. By reorganising the market patterns into an easily understood hierarchy, the Wave Theory allows greater precision in trade decisions, increasing the trader’s confidence, and widens his horizon by stretching the field beyond the randomness of short-term market events. All these make it possible to formulate more sophisticated and advanced strategies in trading while still keeping the necessities and implications of the immediate market action in mind. Disadvantages The weakness of the Elliott Wave Theory is its arbitrariness. It is rare to have two analysts examine the same chart part pattern and reach the same conclusions or draw the same wave patterns as a result. Indeed, it is almost possible to imagine a complex price pattern on which a large number of analysts will reach consensus. The main reason of this problem is the intuitive, fluid formulation of the theory itself. By attempting to place market dynamics into the strict formalism of a deterministic theory, the analyst deprives himself of the benefit of the insight that prices will and often do move for reasons which do not in any way accept explanation by referencing the past. In other words, it is possible that the market will create recurring patterns that appear to be cyclical without any simplistic underlying causality based on patterns and visual analysis. And when the wave theorists try to disregard this fact and confine the price into an arbitrary structure devised on very strict rules, the outcome is a rainbow pattern of scenarios that have little relationship to actual market dynamics, or the realized future market trends. In summary, we can say that the Wave Theory is useful as a tool for organising one’s opinion about the markets, but it has very little predictive power in the storm of real market action. One could certainly use the theory to generate entry/exit points for trades, but success is only possible if the notion of precision is discarded, and the data is evaluated with strategies suitable to a chance game.
How to trade with the indicator profitably:The key aspects of the indicator are the most important support and resistance price zones watched by the biggest banks, financial institutions and many forex traders. The indicator will show you the most important price zones, where crucial price moves with profitable opportunities will occur. These price zones should monitor every professional forex trader. Easy to use and highly effective indicator for free With the indicator, you can see the most important support/resistance zones watched by many traders and institutions High probability of market reaction on the zones Useful for all currencies and timeframes Compatibility: MetaTrader 4 Regularly updated for free 1) Range trading - trade pullbacks.2) Trade reversals as soon as supports become resistances or resistances become supports.3) Take profits or set stop-loss based on support/resistance zones.In the settings file, I painted support and resistance levels in different colors. The darker the color, the stronger the level. This is also shown in the screenshot of the settings.Good luck and a profit for everyone!