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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 occured 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).
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