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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.
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