The sole purpose of trading is to make profits for every capital you invest. With the right tools, you are assured of getting positive returns for every trade you make. And every diligent trader knows the variety of tools at his disposal to ensure that he not only makes but maximizes returns. In this article, we want to look at the weighted moving average (WMA) indicator, how it works and when it is advisable to use it. (Try out indicators on Tradingview.com)
What Is the Weighted Moving Average Indicator?
There are several Moving Average (MA) indicators, including the Simple Moving Average (SMA), Weighted Moving Average (WMA), and Exponential Moving Average (EMA) indicators. Moving Averages is a price-based lagging indicator, which displays the average closing prices of a security over a specific period of time. Click this link to access an economic calendar for your trading strategies
The Weighted Moving Average gives different days and most recent data points more weight by assigning a multiplier to each data point within the period, which changes the significance of that particular data point. The most recent data point is assigned the largest multiplier or is weighted more, making it more significant. The assignment then descends in order with the oldest point receiving the least multiplier.
Weighted Moving Average Indicator | Indicator Series Click To TweetWith the Weighted Average Tool, you can generate trade directions, trade signals, and make better buying or selling decisions.
How Is the Weighted Moving Average Calculated?
The WMA is obtained by multiplying every number on the data set by a predetermined weight, depending on how recent the data point is, and adding together the resulting values. Recent data points are more significant than older ones, thus are assigned higher weighting than the latter. The sum of the weight equals 1 or 100%.
WMA = Sum of Weighted Averages Values/Sum of Weight
For example,
A 5 period WMA is calculated as, (P1 * 5) + (P2 * 4) + (P3 * 3) + (P4 * 2) + (P5 * 1) / (5 + 4+ 3 + 2 + 1), where P1 is the most recent data point and P5 the oldest.
Why Use the Weighted Moving Average (WMA) Indicator?
- The WMA enables traders to generate trade signals more accurately than the Simple Weighted Averages indicator.
- Unlike in the Simple Weighted Average indicator where all data points are assigned the same weight, WMA gives final values that reflect the significance of each data point. WMA is more descriptive of the frequency of the concurrency, helping you make better trading decisions.
- It helps you determine trend direction, prompting you to buy when prices are near or below the WMA, or sell when the prices move towards or above the WMA.
- WMA helps identify support and resistance areas, with a rising WMA indicating support for the price action and vice versa.
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