A Weighted Moving Average puts more weight on recent data and less on past data. This is done by multiplying each bar’s price by a weigh ng factor.
Because of its unique calculation, WMA will follow prices more closely than a corresponding Simple Moving Average.
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How this indicator works
• WMA is used to help determining trend direction. It could be an indication to buy when prices comes near or just below the WMA. It could be an indication to sell when prices come near or just above the WMA.
• Moving averages can also indicate support and resistance areas. A rising WMA tends to support prices, while a falling WMA tends to provide resistance to prices. This strategy reinforces the idea of buying when price is near rising WMA or selling when price is near falling WMA.
• All moving averages, including the WMA, are not designed to identify trade at the exact bottom or top. Moving averages tend to validate that the trade is in the general direction of trend, but with a delay at entry and exit. WMA has shorter delay than SMA.
• Use same rules that apply to SMA when calculating WMA. Keep in mind, WMA is more sensitive to price movement. This can be a double-edged sword. On one side, WMA can identify trends faster than SMA. On the other hand, WMA experience more whipsaws than corresponding SMA.
Calculation
The most recent data is more heavily weighted, and contributes more to the final WMA value. The weigh ng 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, etc…
How are moving averages used?
Moving averages with different me frames can provide a variety of information. A longer moving
average (such as a 200-day EMA) can serve as a valuable smoothing device when you are trying to
assess long-term trends.
A shorter moving average, such as a 50-day moving average, will more closely follow the price ac on,
and therefore is frequently used to assess short-term pa erns. Each moving average can serve as a
support and resistance indicator, and is frequently used as a short-term price target or key level.
How exactly do moving averages generate trading signals? Moving averages are widely recognized
by many traders as potentially significant support and resistance price levels. If the price is above a
moving average, it can serve as a strong support level—meaning if the stock does decline, the price
might have a more difficult me falling below the moving average price level. Alternatively, if the price
is below a moving average, it can serve as a strong resistance level—meaning if the stock were to increase,
the price might struggle to rise above the moving average.