Friday, May 24, 2024

Weighted Moving Average (WMA)

A Weighted Moving Average (WMA) is a type of moving average that puts more weight on recent data and less on past data.

A moving average is a technical indicator that shows you how the price has moved, on average, over a certain period of time.

Because of its unique calculation, WMA will follow prices more closely than a Simple Moving Average (SMA).

A Weighted Moving Average (WMA) also puts greater importance on recent data than the Exponential Moving Average (EMA) by assigning values that are linearly weighted to ensure that the most recent prices have a greater impact on the average than older prices.

WMA vs EMA vs SMA

Weighted Moving Average (WMA) vs. Simple Moving Average (SMA)

When using WMA, the same rules apply as when using the SMA.

Since the WMA has a shorter delay then the SMA, the WMA is generally more sensitive to price movement.

This can be good and bad.

It’s good because the WMA can identify trends sooner than the SMA.

It’s bad because the WMA will probably experience more whipsaws than the SMA.

How to Calculate Weighted Moving Average (WMA)

The Weighted Moving Average (WMA) places more emphasis on recent prices than on older prices.

Each period’s data is multiplied by a weight, with the weighting determined by the number of periods selected.

The weighting factor used to calculate the WMA is determined by the period selected for the indicator.

For example, a 5 period WMA would be calculated as follows:

WMA = (P1 * 5) + (P2 * 4) + (P3 * 3) + (P4 * 2) + (P5 * 1) / (5 + 4+ 3 + 2 + 1)

Where:

P1 = current price
P2 = price one bar ago, and so forth…

You can customize the weighted moving average more than the SMA and EMA.

The most recent price points are usually given more weight, but it could also work the other way, where you give historical prices more weight.

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