Weighted Moving Average (WMA)

Definition

Weighted Moving Average (WMA) is a type of moving average that assigns different weights to price data points in a linear manner, with greater weight typically given to more recent data points and lesser weight to earlier data points. This method allows for quicker responsiveness to recent market price changes. Compared to other types of moving averages such as Simple Moving Average (SMA) and Exponential Moving Average (EMA), WMA is more sensitive to current market conditions by emphasizing the significance of the most recent data points.

Calculation

The formula for calculating WMA is as follows:

WMA n= [n*Pn+(n−1)*P(n−1)+...+1*P1] / n+(n-1)+...+1

Where:

  • Pn represents the current price,

  • n is the number of days considered for the WMA calculation.

Difference Between EMA and WMA

WMA decreases weights linearly, whereas EMA decreases weights exponentially. For example, in WMA, each preceding weight is typically 0.5 less than the next, whereas in EMA, the differences between weights can vary significantly, possibly starting with a difference of 0.5 and then increasing to 0.8.

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