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DEMA
Description
DEMA
is a unique smoothing indicator developed by
Patrick Mulloy. It
was originally introduced in the February 1994
issue of Technical
Analysis of Stocks & Commodities magazine.
As
Mr. Mulloy explains in the article:
"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
is an acronym that stands for Double Exponential
Moving Average. However,
the name of this smoothing technique is a bit
misleading in that it is not simply a moving
average of a moving average.
It is a unique composite of a single
exponential moving average and a double
exponential moving average that provides less lag
than either of the two components individually.
Interpretation
DEMA
can be used in place of traditional moving
averages. You
can use it to smooth price data or other
indicators. Some
of Mr.
Mulloy's original testing
of DEMA was done on the MACD.
Oddly, he found that the faster
responding DEMA-smoothed MACD produced fewer (yet
more profitable) signals than the traditional
12/26 smoothed-MACD.
This
type of smoothing is certainly not limited to the
MACD. You
may want to experiment on other indicators as
well. |
