Weighted Moving Average

9.Weighted Moving Average

9.Weighted Moving Average

The illustration below will give a clear picture of how a five-day weighted moving average is calculated.

weighted

The weight is based on the number of days in the moving average. The weight on the first day is 1.0 while the value on the most recent day is 5.0. Today’s price is given five times more weightage than the price five days ago,

Five-Day Weighted Moving Average

DayNo. Weight Price Weighted Average
1 1 * 25 = 25
2 2 * 26 = 52
3 3 * 28 = 84
4 4 * 25 = 100
5 5 * 29 = 145
Total 15 * 133 = 406 / 15 = 27.067

The latest values of prices will have a greater “weightage” than the older values. It functions identical to the SMA.

weighted

During Uptrend: It will function as a support for the price movements.

During Downtrend: It will function as a resistance for the price movements.

Attention to be given here when the Price crosses the weighted moving average.

When the Price breaks below (Go from above to below) the WMA signals decline in prices.

When the Price breaks above (Go from below to above) the WMA signals rise in prices.

The challenge faced while using the moving average:

To recognize the point in which the Prices cross the Moving Average.

Whether this point is important or not for the Price movements.

Recommendation for confirmation of signals:

Usage of other oscillator-indicators, Candlestick Patterns of Patterns from the Technical Analysis