Weighted Moving Average (WMA)
The Weighted Moving Average (WMA) finds the average price of a security over a set number of periods. It gives more weight to the more recent prices, relative to older prices, in an attempt to reduce the lag associated with moving averages, in general. This is calculated by multiplying each of the previous interval’s data by a weight based on the period length in the WMA. Each price is multiplied by a factor, with the current price having the highest factor and each price after that having a factor of the prior price less one.
The formula for the WMA is:
The WMA is an upper technical study. ProSticks allows up to three WMAs to be plotted at one time. Default parameters of 10, 20, and 50 bars are used to calculate the WMA. Other than the Close, the High, Low, and ProSticks Modal Point are also available to use for the calculation of this Moving Average.
Most traders use the WMA as a crossover trading system. Two WMAs are plotted and the shorter period WMA is used as the signal line. For example, if the shorter period WMA crosses over the longer period WMA from below to above, then it is considered bullish and a buy opportunity. Conversely, if the shorter period WMA crosses over the longer period from above to below, then it is considered bearish and a sell opportunity.
The WMA is also used as a support and resistance level. If the price moves away from the WMA and retraces back, more often than not, the WMA will prove to be a strong support or resistance, depending on the prevailing trend. Note that only certain common WMAs can be used for this purpose. 50 and 200 bars are commonly used to measure support and resistance.
Since the WMA emphasizes more on recent prices, this indicator is more sensitive to price fluctuations than other Moving Averages and thus, the WMA provides earlier indications to trend reversals.