In all our articles until now we have focused on the simple put and call options also known as forex magazzino options and related strategies. In this last article we will focus on exotic options.
Exotic options are characterized by a greater complexity than that of the commonly traded vanilla options. Vanilla options are considered simple since the payoff profile is continuous and is only dependent on the value of the underlying at expiry. Exotic options are everything else – which is a very large definition. Therefore, in this article we will only focus on the vanilla option with in and out features known as knock-in, knock-out, reverse-knock-in, and reverse-knock-out. Furthermore, we will look at the American digital option one-touch, no-touch, and double-no-touch.
The knock-out option functions by being an ordinary vanilla option, put or call, unless a pre-specified barrier level is reached, or touched, before expiry. The option is termed reverse if the barrier is placed where the option is in-the-money. While the purchaser of the exotic option does gain an exposure similar to the vanilla option, the pricing dynamics do change dramatically. With vanilla options, the price is always increasing with respect to the volatility parameter.
However, barrier options can behave quite differently. Another class of exotics options are the American digitals also known as touch options. They function like bets by paying a predetermined amount if a certain condition is met. The payoff is thus the full amount or nothing, which gives rise to the term digital.
Looking at the quotation as the probability of hitting the barrier, we will see for the one-touch option the effect of the varying volatility and black swans, explained in the previous article. In this article we have touched upon the subject of exotic options, there exist many other forms of exotic options such as chooser options, basket options, lookback options, to mention a few of their colorful names. These will be left alone for now. The options explained in this article cover the most heavily traded exotic options which we consider an interesting starting point for most traders. Moving average developed with the purpose of reducing the lag time found in traditional moving averages.
DEMA was first time introduced in 1994, in the article “Smoothing Data with Faster Moving Averages” by Patrick G. 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 not just a double EMA. DEMA is also not a moving average of a moving average.
EMA for a lesser lag than either of the original two. DEMA can be used instead of traditional moving averages or the formula can be applied to smooth out price data for other indicators, which are based on moving averages. DEMA can help to spot price reversals faster, comparing to regular EMA. Such popular trading method as Moving average crossover, will gain a new meaning with DEMA. Let’s compare 2 EMA crossover vs 2 DEMA crossover signals. Some of Mulloy’s original testing of DEMA indicator was done on the MACD, where he discovered that the DEMA-smoothed MACD was faster to respond, and despite producing fewer signals, gave higher results than the regular MACD.
Besides MACD, DEMA smoothing method can be applied to various indicators. Another smoothing method developed by Mulloy is known as TEMA, which is a Triple Exponential Moving Average or, yet another Triple EMA version, developed by Jack Hutson – TRIX indicator. The DEMA formula I made below looks like incorrect, because I test it and it losing money. Could you please tell me the correct one. Hi, I am unable to see the macd charts of dema. Whenever I open it shows olny blank indicator windows.
I have tried all the options that I can try only as a basic user of MT4 as I am not good in coding. Can you please help me solve this problem? Whats the process for installing DEMA in MT4? Av tried coping the download but it didnt work. U are doing a great job.