Weighted Moving Average (WMA)

Name Type Prerequisite Use Cases
Weighted Moving Average (WMA) Trend OHLC Data Provides a faster response than SMA while being less volatile than EMA.

Definition

The Weighted Moving Average (WMA) is similar to the SMA but assigns a linear weighting to the data points, giving more mathematical importance to recent data points. This makes it more responsive to price changes than the SMA.

Mathematical Equation

\[ WMA_n = \frac{\sum_{i=1}^{n} P_i \times i}{\sum_{i=1}^{n} i} \]

Where \(P_i\) is the price at period \(i\) (with \(n\) being the most recent). denominator is the triangular number \(\frac{n(n+1)}{2}\).

Special cases

  • Maximum possible value: Unbounded
  • Minimum possible value: 0
  • Behavior: Follows the price, giving linear weight to recent data points.

Visualization

WMA

Trading Significance

  1. Trend sensitivity: WMA reacts faster to price changes than SMA, helping to catch trends earlier.

  2. Support/Resistance: Can act as dynamic support/resistance lines.