The Weighted Moving Average places more importance on recent price moves; therefore, the Weighted Moving Average reacts more quickly to price changes than the regular Simple Moving Average (see: Simple Moving Average).
A basic example (3-period) of how the Weighted Moving Average is calculated is presented below:
- Prices for the past 3 days have been $5, $4, and $8.
- Since there are 3 periods, the most recent day ($8) gets a weight of 3, the second recent day ($4) receives a weight of 2, and the last day of the 3-periods ($5) receives a weight of just one.
- The calculation is as follows: [(3 x $8) + (2 x $4) + (1 x $5)] / 6 = $6.17
The Weighted Moving Average value of 6.17 compares to the Simple Moving Average calculation of 5.67. Note how the large price increase of 8 that occurred on the most recent day was better reflected in the Weighted Moving Average calculation.
The chart below of Wal-Mart stock illustrates the visual difference between a 10-day Weighted Moving Average and a 10-day Simple Moving Average:
Potential buy and sell signals for the Weighted Moving Average indicator are discussed in depth with the Simple Moving Average indicator (see: Simple Moving Average).
How to Get Started Trading
If you are interested in trading using technical analysis, have a look at our reviews of these regulated brokers available in to learn which charting & analysis tools they offer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.90%-89.00% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
If you’d like a primer on how to trade commodities in general, please see our introduction to commodity trading here.