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WEIGHTED MOVING AVERAGE
Doug Schaff
FX-Strategy
| Characteristic: | Trend Direction | |
| Parameter Defaults: | WMA Period | 10 controls the measurement period for the Average |
| Plots: | WMA |
One of the features of a simple moving average is the lag in reacting to changes in price direction. Since it allocates equal weighting to each price point in the equation it implies that the price point 'x' periods ago has equal importance as the current bar. This will result in the simple moving average reacting quite slowly to price reversals.
Some analysts and traders feel that the current bar is more important than the first bar in the measurement range and the weighted moving average is one method of allocating more weighting to recent price movement. It does this very simply by incorporating a series of multipliers to each price point, the largest to the most recent bar and the least to the first price in the series, then dividing the sum of these by the sum of the multipliers.
WMA5 = (Closet * 5 + Closet-1 * 4 + Closet-2 * 3 + Closet-3 * 2 + Closet-4 * 1) / (5 + 4 + 3 + 2 + 1)
The result is an average that turns much quicker as price reacts in the opposite direction. This does enable traders to spot price reversals much sooner, but also has the counter-effect of providing "false signals" at times when the pullback is brief and the trend resumes.
