Hello Traders! welcome back to another video most of you traders are familiar with the traditional
moving average such as the simple moving average and exponential moving average many traders
rely on them to help get high probability trading entry points and profitable exits
but a well-known problem with the traditional moving averages is the serious lag that is present
in most types of moving averages whether it be simple or exponential moving average
there is another moving average indicator that provides a solution of it by calculating
a faster averaging methodology without almost any lag this indicator is the dema or double
exponential moving average in today's video we will take a look at this lesser known but
very effective moving average indicator that is called dema or double exponential moving average
and we will build a powerful trading strategy before we dive deeper if you are new on the
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dma was created to find a better moving average study which could reduce the lag
of traditional moving average indicators and one that would provide more timely entries
the dema indicator is a double exponential moving average indicator which is more responsive to
recent price data compared to the traditional exponential moving average study since moving
averages tend to be lagging indicators they can generate somewhat delayed trading signals
let's take a look at this chart and compare the differences between the
different types of moving averages to get better understanding of this
here we have a price chart with the following moving average overlays
the red line represents the 100 period simple moving average line the green line represents the
100 period exponential moving average line and the blue line represents the dema moving average line
notice how the double exponential moving average line hugs the price
action better than both the simple moving average and exponential moving average
the double exponential moving average has a complicated formula behind it essentially
the dema indicator is a combination of single and double exponential moving averages that result in
another exponential moving average here is the formula for the dema indicator the exponential
moving average one is equal the exponential moving average of price the exponential
moving average two is equal the exponential moving average of exponential moving average
and the dema is equal two times exponential moving average one minus exponential moving average two
and so as you can see from the formula above the dema takes into account a single exponential
moving average known as exponential moving average one and then a double smooth exponential moving
average known as exponential moving average two and then from here the dema can be calculated
by subtracting the exponential moving average two from two times of exponential moving average one
surely you do not need to memorize this formula to start using the dema technical indicator
your trading platform will automatically plot the dema indicator on your price chart based on
your specific input the dema trading indicator may appear somewhat confusing and complicated
to understand however its uses are fairly straightforward that is to say that many of
the signals that you get from the dema indicator will work similarly to other more traditional
moving average for example we can utilize the dema moving average line to identify trends in
the markets find areas of support and resistance spot potential breakout opportunities and perform
other technical based analysis generally the dema moving average line will provide earlier
entry opportunities since it is more sensitive and responsive to recent price action apart from dema
there is also another indicator called tema the tema stands for triple exponential moving average
do not confuse both of them essentially the triple ema utilizes a triple smooth exponential moving
average along with the single and double smooth exponential moving averages there is no need to
get into the exact formula of triple ema for you to understand that as a triple exponential moving
average it will be even more sensitive to the recent price action than the dema the triple ema
indicator is very well suited for short-term trading due to its more sensitive nature
the dema indicator can also be used for short-term trading and long-term trading
however tends to work better for swing trading opportunities look at this price chart it shows
both the double ema and triple ema indicators plotted on the price chart as you can see the
triple ema is much more sensitive than the double ema double exponential moving average signal types
as we now know the dema indicator is more responsive to recent price action
and as such it can often provide signals earlier more than the traditional moving average
the dema can provide the following signal types trend identification trend identification is one
of the most important aspects of trading without knowing what the current market environment is
it will be difficult to consistently beat the market traders need a method for identifying
whether the market is in an uptrend downtrend or is trading in a sideways range-bound manner
although you can often look at a price chart to get an idea of what the general
trend of the market is you want to have a more objective measure for defining the current trend
the dema moving average line does an excellent job at providing that information
when the price is trading above the dema line and the dema line is sloping upward
then we can say that the trend is up similarly when the price is trading below the dema line
and the dema line the sloping downward then we can say that the trend is down and finally
when the price is trading sideways and the dema indicator appears relatively flat then we can say
that there is no trend in place or that there is no clear direction currently in the market
dynamic support and resistance analysis there are many types of support and resistance levels
in the market and the two primary classes in which most support and resistance levels fall
into include fixed support and resistance and dynamic support and resistance fixed
support and resistance represents levels that are static or fixed based on a particular price level
this includes horizontal price levels the second class of support and resistance levels which are
called dynamic support resistance levels include trend lines moving average lines and more these
dynamic support and resistance levels can change with each new bar that prints on the price chart
so the dema indicator which is a type of moving average study is considered a dynamic support
resistance indicator the double mr indicator can be quite useful in finding levels of support
within uptrend or resistance within a downtrend that is the same that when prices move away from
the dema indicator to the upside and then pull back towards the dema line that intersection can
often create an area of support similarly when prices move away from the dema indicator to the
downside and then pull back towards the dema line that interaction can create an area of resistance
trade entry mechanism technical traders can use the dema indicator as an entry signal
there are a few ways that this can be accomplished the simplest method would be to wait for a price
crossover to the upside of the dema line from below to signal a long entry and along the same
lines you could wait for a price crossover to the downside of the dema line from above to signal a
short entry on the other hand we can combine two dema lines which consists of one shorter
length dema line such as the 20 period with a longer length dma line such as the 50 period
then wait for a crossover of the shorter 21 line above the longer 50 line to signal a long entry
and similarly wait for a crossover of the shorter 21 line below the longer 50 line to signal the
short entry trading strategy all right now we will build a trading strategy that incorporates
the double exponential moving average as one of its core components to make this strategy more
powerful and profitable combine it with different confluences such as price action technical
analysis chart pattern etc in this dema trading strategy will include two technical conditions
first we will make a simple price action analysis such as identifying chart patterns support or
resistance the second technical condition that we will incorporate into this strategy is the dma
in this case we will be used two different dema
the first will be the shorter 20 period dema and the second will be the longer 50 period dema
by rules so here are the rules for entering and managing a long position
step number one identify a bearish channel chart pattern or any other bearish chart pattern
step number two the 20 period dema must cross above the 50 period dema step number three wait
for the price to break and close above the upper resistance line of the chart pattern
step number four enter a market order to buy immediately following the close of the breakout
candle step number five place your stop loss just below the previous swing low step number
six the exit signal will occur upon the 20 period dema crossing below the 50 period dema
cell rules are the opposite of buying rules
thanks for watching in case you have any questions don't hesitate to ask in the
comments please don't forget to like the video and subscribe to the channel see you in the next video