A Weighted Moving Average (WMA) is a type of moving average that assigns a greater weight to recent data points and a smaller weight to older data points. This approach gives more importance to the latest market data, making the WMA more responsive to current price movements.
Like other moving averages, the WMA is calculated by averaging a certain number of data points over a specified period of time. However, the formula used to calculate the WMA includes a weighting factor, which is applied to each data point in the series based on its age.
The formula for calculating the WMA is:
WMA = (P1 x n + P2 x (n-1) + P3 x (n-2) + ... + Pn x 1) / (n x (n+1) / 2)
P1 = the most recent price
n = the number of data points in the series
Pn = the oldest price
In this formula, the most recent price is multiplied by a weighting factor of n, the next most recent price is multiplied by a weighting factor of (n-1), and so on. The sum of these products is then divided by the sum of the weighting factors, which is given by the formula (n x (n+1) / 2).
The resulting WMA line is smoother than the Simple Moving Average (SMA) but more responsive to changes in the underlying data series than the Exponential Moving Average (EMA).
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