The Weighted Moving Average places more importance on recent price moves; therefore, the Weighted Moving Average reacts more quickly to price changes than the regular Simple Moving Average (see: Simple Moving Average). A basic example (3-period) of how the Weighted Moving Average is calculated is presented below:
- Prices for the past 3 days have been $5, $4, and $8.
- Since there are 3 periods, the most recent day ($8) gets a weight of 3, the second recent day ($4) receives a weight of 2, and the last day of the 3-periods ($5) receives a weight of just one.
- The calculation is as follows: [(3 x $8) + (2 x $4) + (1 x $5)] / 6 = $6.17
The Weighted Moving Average value of 6.17 compares to the Simple Moving Average calculation of 5.67. Note how the large price increase of 8 that occured on the most recent day was better reflected in the Weighted Moving Average calculation.
Weighted Moving Average Formula
Weighted moving averages are difficult to construct but more reliable than the simple moving averages, where the average has a tendency to “bark twice”: once at the start of the moving average period and again at the end of the period.
A Weighted moving average (WMA) attaches greater weight to the most recent data. The weighting is calculated from the sum of days.
For a 5-day weighted moving average the Sum of Days is 1+2+3+4+5 = 15
The weighting is shown below:
|5 Day WMA||15.07|
Weighted values are calculated by multiplying today’s price by 5/15, yesterday by 4/15, and so on. The weighted moving average is the sum of the 5 weighted values.
The chart below of Wal-Mart stock illustrates the visual difference between a 10-day Weighted Moving Average and a 10-day Simple Moving Average:
Potential buy and sell signals for the Weighted Moving Average indicator are discussed in depth with the Simple Moving Average indicator (see: Simple Moving Average).
Read more at: https://commodity.com/technical-analysis/ma-weighted/