What is the weighted moving average?

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Most traders will agree that technical indicators are at the heart of any trading strategy. Traders use them lớn analyze past price trends and patterns, as well as forecast future market movements in order lớn make informed trades. While there are many different kinds of indicators available to traders today, the weighted moving average (WMA) remains one of the most popular. That’s thanks to its straightforward formula and its ability to lớn measure market momentum. In this article, we’ll discuss what the weighted moving average is. We’ll also explain how khổng lồ calculate it và take a look at some detailed examples.

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M = Average valueV = Actual valueW = Weighting factorn = Number of periods in the weighting group

Source: help.sap.com

A bit confusing? Let’s use it in a few examples to give you a clearer picture of how khổng lồ use this formula to lớn calculate the weighted moving average.

Example 1

Suppose the closing prices of XYZ stochồng for the past 3 days have sầu been $50, $45, and $60. Calculate the weighted moving average.

Step 1 – Identify the numbers to average

So here we have sầu the three numbers provided — $50, $45, & $60, which were recorded over a three-day period.

Step 2 – Assign the weights to each number

Since there are 3 periods, the most recent day ($60) gets the largest weight of 3, the second recent day ($45) receives a weight of 2, and the last day ($50) receives a weight of just 1. Of course, this is only a simplistic representation. We’ll cover a more detailed weight assignment in the next example.

Step 3 – Multiply each price by the assigned weighting factor and sum them

Using the WMA formula, the calculation will go as follows: <(3 x $60) + (2 x $45) + (1 x $50)> = 320.

Step 4 – Divide the resulting value by the sum of the periods khổng lồ the WMA

The sum of the periods is 1+2+3 = 6. So we have sầu (180 + 90 + 50) / 6 = 53.33 as a three-period weighted average. The WMA value of 53.33 compares lớn the SMA calculation of 51.67. The division by 6 in this step is what brought the weightings sum khổng lồ 6 / 6 = 1.

Let’s look at another example with a proper look at the weighted factor. Remember, they should add up to lớn 100% or 1.

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Example 2

Assume that we want khổng lồ calculate the weighted moving average of five sầu stochồng prices over a 7-day period. The prices are $50.25, $56.39, $58.91, $61.52, $59.32, 55.43, and 54.65, with the last price being the most recent. Now we have the numbers that we want to average so the next step is lớn assign the weighting to each number based on how recent they are and the given period.

DayClosing PriceWeighting Factor
1$50.251/28
2$56.392/28
3$58.913/28
4$61.524/28
5$59.325/28
6$55.436/28
7$54.657/28

Next, we multiply each of the five closing prices by their corresponding weighting factor to lớn find the weighted average.

DayClosing PriceWeighting FactorWeighted Average
1$50.251/28$1.79
2$56.392/28$4.03
3$58.913/28$6.31
4$61.524/28$8.79
5$59.325/28$10.59
6$55.436/28$11.88
7$54.657/28$13.66
SUM1$57.05

Then you add up all of the weighted average individual values lớn arrive at the WMA. The WMA for the five stoông xã prices over the 7-day period is $57.05.

How The Weighted Moving Average Works

Now that you know how to calculate the weighted moving average of a given phối of values, let’s look at how you can use this indicator for your trades:

To help determine trover direction – When the price is above its weighted MA line, it’s usually a signal that on average, the asmix is trading higher than it has over the period being analyzed. This in turn confirms an uptrkết thúc. Alternatively, when the price is below the WMA line, then it confirms a downtrend.To indicate support & resistance areas – A rising weighted MA can indicate tư vấn for price action. While a falling WMA can indicate resistance khổng lồ price action over a given period. Traders tend lớn use this as a strategy to place buy orders when the price is near the rising WMA or place sell orders when the price is near the falling weighted MA.To validate price strength và market momentum – Price action above sầu its moving average shows that the market is getting stronger relative sầu to where it was in the past since the most recent prices now sit higher than the average. On the flip side, price action below its moving average shows that the market is getting weaker relative sầu lớn where it was in the past.To measure price movement – The weighted moving average is generally more sensitive to lớn price movement making it a better measure as well as identifying trends sooner than the SMA. However, this can be a double-edged sword as the WMA is likely to experience more volatility than its corresponding SMA.

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Conclusion

Knowing how khổng lồ use the weighted moving average in conjunction with other technical indicators is an important skill khổng lồ have sầu as a trader. That being said, one type of moving average isn’t necessarily better than others as they simply have sầu different calculation methods for average prices. As such, your trading strategy will ultimately determine what type of MA works best. Additionally, consider adjusting your settings slightly for each market; you may find that a 50-period WMA may provide great signals on one stoông xã, but may not work so well on another. Like any other tool, the key is to lớn know how to use & interpret the WMA to give you the best possible outcomes on your trades.