The weighted moving average (WMA) is one of the varieties of the [[Moving_Averages|moving averages (MA)]].
The essential drawback of the [[Simple moving average |simple moving average (SMA)]] is the assignment of the equal weights to all the prices, irrespective of their remoteness from the current moment.
To eliminate this disadvantage, the weighted moving average was created. In the process of its calculation the weights are selected in such a way, that the most recent prices have the higher weight.
WMA (N) = (W1*X1 + W2*X2 + … + WN*XN) / (W1 + W2 + … + WN),
where W1 < W2 < … < WN.
The weights calculation can vary, depending on the modification of the WMA. There are plenty of WMA's alternatives which apply different variants of weight calculation. For example, in case with linear WMA, a period equals to 5:
WMA (5) = (1*X1 + 2*X2 + … + 5*X5) / (1 + 2 + … + 5).
Like the SMA, the WMA has a delay entering the trend and exiting it. But it is notably less as due to the higher weights of the most recent prices, the reaction to the price change happens much earlier.
The WMA is an arithmetical weighted of the price variations throughout a certain period. As an analytical instrument, it removes part of the SMA inaccuracies, but doesn’t avoid them.
Use: the WMA use is similar to that of the SMA.
1. The delay in entering and exiting the trend is usually significant, but is less than that of the SMA. However, as it was mentioned, due to the higher weights of the last prices, it reacts faster to the price change.
2. In the side head (the trading range), the WMA gives plenty of false signals, and causes losses, which is also the SMA's drawback.
3. As the most recent price is given the highest weight, at the entrance of the price calculation, different from the market price level, the WMA changes more, than the SMA, though at the exit of this price, the second false sign is not given.
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