Weighted moving averages

Posted by Scriptaty | 9:37 PM

One reason the SMA lags price is because all prices are equally weighted — the current close and the first close have the same impact on the average. A weighted moving average (WMA) uses specific multipliers to weight each price, giving the most weight to the most recent price and reducing this emphasis the further back in time you go. Thus, the most current price impacts the WMA more than the last price in the look-back window.

For example, a 10-bar WMA multiplies the current price by 10, the next most recent price by 9, the next by 8, and so on. The sum of these weighted prices is divided the sum of the weights, which is 55 (10 + 9 + 8 + 7… 1) in this example.

It compares a 10-bar WMA (blue) to the 10-bar SMA (red). Notice the WMA crests and troughs(points A and C) ahead of the SMA. The WMA responds much quicker to the reversal pattern sat the top and bottom, which took approximately five days. In contrast, the SMA required either more time or a more dramatic price move to reverse its trend. But point B’s countertrend move did not derail the descent of the WMA.

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