A Weighted Moving Average (WMA) is a form of moving average that assigns greater significance to recent data while giving less importance to older data. It serves as a technical indicator that reflects how the price has changed, on average, over a specified timeframe.

Due to its distinct calculation method, the WMA tends to track prices more closely than a Simple Moving Average (SMA). The WMA emphasizes recent data more than the Exponential Moving Average (EMA) by applying linearly weighted values, ensuring that the latest prices have a more substantial influence on the average compared to older prices.

In this calculation, the oldest price included is assigned a weight of 1, the next oldest a weight of 2, and so on, up to the most recent price. For instance, consider the following prices:

• Day 1: Price = 100
• Day 2: Price = 102
• Day 3: Price = 105
• Day 4: Price = 104
• Day 5: Price = 110

The denominator for the weights would be 1 + 2 + 3 + 4 + 5 = 15. Thus, the 5-Day WMA would be calculated as follows:

WMA = 100*(1/15) + 102*(2/15) + 105*(3/15) + 104*(4/15) + 110*(5/15) = 105.7

Many traders find this approach more relevant for identifying trend direction, particularly in fast-moving markets. However, a drawback of using WMA is that it may appear "choppier" than a Simple Moving Average (SMA), making it harder to distinguish a genuine trend from random price fluctuations, which could lead to false trade signals. Consequently, some traders opt to display both a Simple Moving Average (SMA) and a Weighted Moving Average (WMA) on the same price chart.

All moving averages, including the Weighted Moving Average (WMA), are not intended to pinpoint a trade at the exact peak or trough. Instead, moving averages generally confirm that your trade aligns with the overall trend, albeit with a delay in entry and exit points.

Here’s how to utilize the WMA in your trading:

• The WMA can assist in determining trend direction. If the price is in an uptrend and trading above a rising WMA, consider going long when prices dip near or just below the WMA. Conversely, if the price is in a downtrend and trading below a falling WMA, consider going short when prices rally towards or just above the WMA.
• The WMA can indicate support and resistance levels. A rising WMA typically supports price action, while a falling WMA often provides resistance. This strategy reinforces the concept of buying when the price is close to the rising WMA or selling when it is near the falling WMA.

When using WMA, the same principles apply as with the SMA. Since the WMA reacts more quickly than the SMA, it is generally more responsive to price changes. This sensitivity can be both advantageous and disadvantageous. On the positive side, the WMA can detect trends earlier than the SMA. On the downside, it may also experience more whipsaws compared to the SMA.

The Weighted Moving Average (WMA) emphasizes recent prices more than older ones. Each period's data is multiplied by a weight, which is determined by the number of periods selected. The weighting factor for calculating the WMA is based on the chosen period 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 from one period ago, and so on...

You can customize the weighted moving average more than the SMA and EMA. While the most recent price points are typically given more weight, it is also possible to assign greater weight to historical prices.