Weighted Moving Average
Weighted moving averages are difficult to construct but more reliable than the simple moving averages, where the average has a tendency to "bark twice": once at the start of the moving average period and again at the end of the period.
Weighted Moving Average Formula
A Weighted moving average (WMA) attaches greater weight to the most recent data. The weighting is calculated from the sum of days.
Example: For a 5-day weighted moving average the Sum of Days is 1+2+3+4+5 = 15
The weighting is shown below:
| Day | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Price ($) | 16 | 17 | 17 | 10 | 17 |
| Weighting | 1/15 | 2/15 | 3/15 | 4/15 | 5/15 |
| Weighted value | 1.07 | 2.27 | 3.40 | 2.67 | 5.67 |
| 5 Day WMA | 15.07 |
Weighted values are calculated by multiplying today's price by 5/15, yesterday by 4/15, and so on. The weighted moving average is the sum of the 5 weighted values.
Author: Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.