Weighted Moving Average
Weighted Moving Average (WMA) is one of the most popular indicators. This is due to the simple formula and its ability to measure market momentum. Weighted Moving Average is more descriptive and ultimately more detailed and follows the price more closely than its corresponding Simple Moving Average.
In This Article –
What is the Weighted Moving Average?
How to analyze a chart using Weighted Moving Average?
Category – Trend
Type – Lagging
What is the Weighted Moving Average?
The Weighted Moving Average is a technical indicator that interprets trend direction. It shows how the price has moved on average over a specific time duration. It gives trade signals by assigning greater weight to recent data and less weight to past data points. The data points consist of asset close prices.
Calculation of Weighted Moving Average
Following are the given steps to calculate Weighted Moving Average.
1. Decide the numbers you want to average.
2. Determine the weights of each number.
3. Multiply each number by weighing the factor.
4. Add up the resultant values to get the weighted average.
The formula of the Weighted Moving Average is as under:-
Weighted Moving Average = [Price1 × n + Price2 × (n-1) +…..Price (n)]/ [n× (n+1)]/2
n = time period
How to analyze chart using Weighted Moving Average
All moving averages along with Weighted Moving Average are not designed to locate a trade at the exact bottom or top.
Moving averages are likely to confirm that your trade is in the general direction of the trend but with a delay at entry or exit.
Here’s how you can use the WMA in your trading:
The Weighted Moving Average indicates trend direction.
If the price is in an uptrend and is trading above a rising WMA, you can take a long position when a price goes near or just below the WMA.
If the price is in a downtrend and trading below a falling WMA, you can take a short position when the price rallies towards or a bit above the WMA.
Chart 1:-
https://bpcdn.co/images/2020/05/05170956/wma-short-trade-example-780x440.png
Image Source:- https://www.babypips.com/forexpedia/weighted-moving-average-wma
The Weighted Moving Average can indicate support and resistance areas.
A rising WMA supports the price action.
A falling WMA provide resistance support
So this indicates that you shall buy when the price is near the rising WMA or shall sell when the price is near the falling WMA.
Chart 2
https://bpcdn.co/images/2020/05/05172018/wma-as-support-and-resistance-levels-780x440.png
Image Source:- https://www.babypips.com/forexpedia/weighted-moving-average-wma
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