Weighted Moving Average

What is a Weighted Moving Average (WMA)? The weighted moving average (WMO) is an indicator that assigns greater weight to the recent data points, less weight to those data points in the far distant past, like decades ago. It is a highly effective tool for traders using stochastic or statistical volatility as their trading signal. Usually, traders will use historical volatility but if you are implementing a WMA you can also use other forms of volatility like mean reversion or lagged volatility.

Why use a Weighted Moving Average instead of a Simple Moving Average (SMA)? Well, a WMA is not a simple moving average because it doesn't take into account the price level over time and it doesn't take into account the number of time periods. A simple moving average takes into account all these factors, average them and then uses the result of that average to determine the range of prices that it examines. A good way to think of it is that a SMA goes from low prices up to high prices. A WMA on the other hand only goes from high prices to low prices over the time period it examines.

How does a weighted moving average model work? Well, you start with a current time series called the starting point, and you add up all the high price times recorded in the time series. You then take the average of all the high price times, add it to all the low price times so that when it gets closer to zero you know that it is time to enter a trade. You would do this by adjusting your stop loss accordingly. That's basically how a Weighted Moving Average works.

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