Patrick Mulloy created the DEMA indicator for MT4 in order to eliminate the lag in moving averages. DEMA – Double Exponential Moving Average – produces less delay or lag than typical simple moving averages. The indicator is a hybrid of the single and double exponential moving averages, with a shorter lag than the single or double EMA. As a result, the indicator can detect price reversals earlier than traditional moving averages.
What is the MACD DEMA Indicator?
Because the indicator is simple to use, both new and experienced forex traders can use it to trade. Furthermore, when used to calculate other technical indicators such as the MACD, the DEMA produces earlier indications than the standard MACD. As a result, expert forex traders can incorporate the DEMA into indicators and trading systems that employ standard moving averages to smooth the indication. The indicator works on all intraday price charts as well as daily, weekly, and monthly price charts. As a result, forex traders can employ the indicator in scalping, short-term, and long-term trading strategies.
MACD DEMA Strategy
The indicator’s direction indicates the potential direction of the market trend. If the indicator line is pointing up, it indicates a bullish trend. Similarly, a downward-pointing indicator line suggests a bearish price trend. The ideal trading method, however, is to trade with the slow and rapid period crossover. The basic crossover trading method is used when these two indicator instances intersect. A bullish crossover occurs when the fast DEMA crosses the slow DEMA upwards. As a result, forex traders could place a buy order with a stop loss below the previous swing low. Because the crossover does not specify a profit target, traders can exit at the opposite trading signal or with a favorable risk-reward ratio. Similarly, a bearish market scenario is indicated when the fast DEMA crosses below the slow DEMA. Traders could enter a sell position with a stop loss just above the last swing high.
Buy Signal
The following could be your checklist for a buy trade:
- When the asset being traded is up trending.
- When a bullish crossover of the indicator occurs from the oversold region.
Once these events occur:
- You could open a buy position after you confirm your entry with bullish candlestick patterns.
- You could set your stop loss just below the nearest swing low.
- You could set your take profit at the nearest resistance zone, or you could exit trade when a bearish crossover occurs.
- For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Sell Signal
The following could be your checklist for a sell trade:
- When the asset being traded is down trending.
- When a bearish crossover of the indicator occurs from the overbought region.
Once these events occur:
- You could open a sell position after you confirm your entry with bearish candlestick patterns.
- You could set your stop loss just above the nearest swing high.
- You could set your take profit at the nearest support zone, or you could exit trade when a bullish crossover occurs.
- For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
MACD DEMA Pros & Cons
Pros
- The MACD DEMA Indicator can be used by traders to predict potential price reversal zones.
- The indicator can be used to detect trend direction as well as divergences.
Cons
- The MACD DEMA Indicator may sometimes mistake a trend reversal for a trend correction and vice versa.
- This indicator may not meet the trader’s expectations in a narrow-ranging market on smaller timeframes.
Conclusion
The MACD DEMA indicator is more responsive to price fluctuations than traditional moving averages. However, because the indicator line is very close to the price, inexperienced forex traders may be confused. Although the DEMA crossover trading approach is effective, the indicator should probably not be used as a stand-alone. As with every technical indicator, it is better used when combined with other technical tools and indicators.
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