InvestorQ : How are the weighted moving averages calculated in practice and how is it used in trading?
Crowny Pinto made post

How are the weighted moving averages calculated in practice and how is it used in trading?

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Mahima Roy answered.
2 years ago
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The general rule in WMA is that the most recent data is more heavily weighted, and contributes more to the final WMA value. The weighting factor used to calculate the WMA is determined by the period selected for the indicator. For example, a 5 period WMA would be calculated as follows:

WMA = (P1 * 5) + (P2 * 4) + (P3 * 3) + (P4 * 2) + (P5 * 1) / (5 + 4+ 3 + 2 + 1)

Formulas can be confusing so let us take a live example to see the WMA calculation

Where: P1 = current price and P2 = price one bar ago, etc…

Date

Close

5-day Moving Average

Weights

5 Day Weighted Total

5-day Weighted Moving Average

23-Oct

1,149.90

1

24-Oct

1,152.15

2

25-Oct

1,149.40

3

26-Oct

1,153.20

4

27-Oct

1,145.05

1,149.94

5

17,240.45

1,149.36

28-Oct

1,135.45

1,147.05

17,168.00

1,144.53

29-Oct

1,131.20

1,142.86

17,088.75

1,139.25

30-Oct

1,145.50

1,142.08

17,101.95

1,140.13

31-Oct

1,136.80

1,138.80

17,075.55

1,138.37

01-Nov

1,122.90

1,134.37

16,996.05

1,133.07

02-Nov

1,138.30

1,134.94

17,015.70

1,134.38

03-Nov

1,134.60

1,135.62

17,014.00

1,134.27

04-Nov

1,103.85

1,127.29

16,855.15

1,123.68

05-Nov

1,103.85

1,120.70

16,737.95

1,115.86

06-Nov

1,103.85

1,116.89

16,653.70

1,110.25

07-Nov

1,100.80

1,109.39

16,573.25

1,104.88

08-Nov

1,080.20

1,098.51

16,427.30

1,095.15

09-Nov

1,061.50

1,090.04

16,242.25

1,082.82

10-Nov

1,020.00

1,073.27

15,892.05

1,059.47

11-Nov

1,047.80

1,062.06

15,764.70

1,050.98

12-Nov

1,052.40

1,052.38

15,716.40

1,047.76

13-Nov

1,053.70

1,047.08

15,723.00

1,048.20

14-Nov

1,041.15

1,043.01

15,693.35

1,046.22

15-Nov

1,041.15

1,047.24

15,684.05

1,045.60

16-Nov

1,052.40

1,048.16

15,709.85

1,047.32

17-Nov

1,066.35

1,050.95

15,800.80

1,053.39

18-Nov

1,087.90

1,057.79

15,985.55

1,065.70

19-Nov

1,079.00

1,065.36

16,091.60

1,072.77

20-Nov

1,060.70

1,069.27

16,068.30

1,071.22

21-Nov

1,057.75

1,070.34

16,010.70

1,067.38

22-Nov

1,049.05

1,066.88

15,904.25

1,060.28

23-Nov

1,046.25

1,058.55

15,801.10

1,053.41

24-Nov

1,044.40

1,051.63

15,730.35

1,048.69

25-Nov

1,028.20

1,045.13

15,613.20

1,040.88

26-Nov

1,047.35

1,043.05

15,624.30

1,041.62

27-Nov

1,052.80

1,043.80

15,673.05

1,044.87

28-Nov

1,069.50

1,048.45

15,801.55

1,053.44

29-Nov

1,077.55

1,055.08

15,947.05

1,063.14

30-Nov

1,095.85

1,068.61

16,150.90

1,076.73

01-Dec

1,107.10

1,080.56

16,343.35

1,089.56

02-Dec

1,083.15

1,086.63

16,356.30

1,090.42

03-Dec

1,103.45

1,093.42

16,440.40

1,096.03

04-Dec

1,083.75

1,094.66

16,392.05

1,092.80

05-Dec

1,100.85

1,095.66

16,423.00

1,094.87

06-Dec

1,096.35

1,093.51

16,426.45

1,095.10

07-Dec

1,096.35

1,096.15

16,440.65

1,096.04

08-Dec

1,104.75

1,096.41

16,483.65

1,098.91

09-Dec

1,104.70

1,100.60

16,525.10

1,101.67

10-Dec

1,086.30

1,097.69

16,453.60

1,096.91

11-Dec

1,105.40

1,099.50

16,492.15

1,099.48

12-Dec

1,105.25

1,101.28

16,520.90

1,101.39

13-Dec

1,078.90

1,096.11

16,409.00

1,093.93

14-Dec

1,074.05

1,089.98

16,298.70

1,086.58

15-Dec

1,069.35

1,086.59

16,195.55

1,079.70

16-Dec

1,050.80

1,075.67

16,016.60

1,067.77

17-Dec

1,063.30

1,067.28

15,954.75

1,063.65

18-Dec

1,055.70

1,062.64

15,896.85

1,059.79

19-Dec

1,049.95

1,057.82

15,833.40

1,055.56

20-Dec

1,083.40

1,060.63

15,961.30

1,064.09

21-Dec

1,133.00

1,077.07

16,323.15

1,088.21

22-Dec

1,139.90

1,092.39

16,637.30

1,109.15

23-Dec

1,131.90

1,107.63

16,834.85

1,122.32

24-Dec

1,139.65

1,125.57

16,994.95

1,133.00

25-Dec

1,121.25

1,133.14

16,973.35

1,131.56

26-Dec

1,137.05

1,133.95

16,992.90

1,132.86

27-Dec

1,136.25

1,133.22

17,004.40

1,133.63

In the above case, we have used a 5-day moving average and in case the latest of the 5 days is given a higher weightage. How do we interpret the chart? There are 2 simple rules to follow here. Firstly, the buying signals are generated when the spot price crosses above the WMA line or when the lower frequency WMA line crosses above the higher frequency WMA line. On the other hand, the selling signals are generated when the spot price crosses below the WMA line or when the lower frequency WMA line crosses below the higher frequency WMA line.
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