The Double Exponential Moving Average (EMA) refers to an indicator that requires two separate moving averages for analyzing uptrends whenever the price goes over the average and confirming downtrends when prices go below average. Any time the price moves away from the average, it will affect the trend change. Also, moving averages help to signify support or resistance territories.
You Can Calculate The Double Exponential Moving Average Using the formula:
DEMA=2×EMAN − EMA of EMAN
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What the Indicator Is Used For
DEMA averages are effective for identifying trends in markets. Their most common use is:
1. Trend Analysis
DEMA is an effective measure used for technical analysis. The direction of the DEMA measures how assets prices may move in the future. A rising DEMA shows a likely increase in price, while a decrease DEMA shows a probable asset price fall.
2. Support and Resistance
Another critical use of DEMA is to show support and resistance levels of stock prices. The levels show the stock prices will show a little inertia to increase, while support levels indicate the prices are likely to fall below. (Click this link to check when the next NFP is scheduled).
Essential Tips on Using DEMA
DEMA moving average is not like any other traditional simple moving average line. The DEMA price indicator is highly responsive to the current price action. As a result, the DEMA line often hugs price action better than any traditional SMA or EMA. Traders must seek faster timing signals in various standard moving average indicators.
Difference between Different Moving Averages
The most common indicators are the simple moving average and exponential moving average. The simple moving average shows the simplest average of the past n-day asset prices, while the exponential moving average offers more weight on the most recent observation.
In summary, moving averages use technical indicators. A greater weight on a recent observation offers a greater moving average that is susceptible to price changes. This makes DEMA the most preferred indicator by short-term traders. On the other hand, simple moving averages are effective for long-term investors.
Do you have any questions on the use of Double Exponential Moving Average? Schedule a call with us at DGM Tech Solutions Limited to find the answers you are looking for.