Weighted Moving Average

Definition

Weighted Moving Averages (WMAs) were developed to expand upon traditional Moving Averages and Exponential Moving Averages. By adding more weight to the most recent price data of Moving Averages (MAs), Weighted Moving Averages are used to weight specific time periods in it calculation more than other time periods.

Calculations

Takeaways

John J. Murphy explained the Weighted Moving Average in his writing titled, "Technical Analysis Of The Financial Markets,” published by the New York Institute of Finance in 1999. Murphy showed how the EMA “addresses both of the problems associated with the simple moving average.” To start, the Weighted Moving Average uses the most recent data available with a greater weight added. It is therefore referred to as a Weighted Moving Average (WMA). In turn, the WMA “assigns lesser importance to past price data,” although it includes all data found throughout “the life of the instrument” into its calculation.

What to look for

With the Weighted Moving Average, users are able to adjust the weight assigned to the indicator, so that it holds greater or lesser weight to the most recent day’s price. This weight is then added to a percentage of the prior day’s value, and the sum of the two will be equal to 100.

Summary

The Weighted Moving Average is useful to determine key price points and visualize a smoothed line with specific weights assigned to it. It accomplishes this by utilizing greater or lesser weight, depending on user preference, and applying it to the most recent price data available on the chart. More information on Moving Averages can be found here.

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