How to Use Weighted Moving Average in Forex Trading - ForeXposed

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Thursday, September 7, 2017

How to Use Weighted Moving Average in Forex Trading



The first question that appears in our mind is what the difference between Simple Moving Average (SMA) and Weighted Moving Average (WMA)? Of course, there are differences. Quite different that are classified into two parts. Not enough different that their names are similar because it uses the same methodology, but the way to use is different.

Imagine this: Which price has the greater emphasis on weight in predicting the future prices. The price of the last hour we have or the price of two months ago we have? Of course, the last one hour. At least the price movement of the last hour will be more representative in predicting the price compared to the price of two months ago.

Or if is applicable to everyday life, take we're going to buy a cell phone. Of course, we are going to find out the mobile phone prices in the span of last time. Well, maybe we will pay more attention to the price of a day ago compared the price two weeks ago because we think that the price movement will not vary much with the price one week ago.

This weight valuation is the assessment by WMA. On SMA, the weighting of price two weeks ago or two days ago have the same scoring weight. On WMA, the last data has a greater weight in value compared to the previous prices.

The values weight in the WMA will depend on the length of the period we set. The longer the periods we assigned, then the greater weighting given to the latest data.

Overall, the methodology on WMA is the same as in SMA because it is the way to calculating is the same, have a difference in weighting values only. Here's the summary:

1.WMA is below the price.
Bullish conditions / Uptrend.
2.WMA is above the price.
Bearish conditions/Downtrend.
3.WMA crossing the price from below.
Trend changes towards bearish.
4.WMA crossing the price from above.
Trend changes toward bullish.
5.Shorter WMA period crossing longer WMA period from the bottom.
Trend changes towards bulish.
6.Shorter WMA period crossing longer WMA period from above.
Trend changes towards bearish.
7.Longer WMA period is above shorter WMA period.
Bearish conditions / Downtrend.
8.Longer WMA is  below shorter WMA period.
Bullish conditions / Uptrend.
  
The picture below is the application to predicting the trend using WMA. How to use is exactly the same as using SMA. Note the difference between SMA and WMA below:

How to Use Weighted Moving Average in Forex Trading

And below is using WMA in two different periods:

How to Use Weighted Moving Average in Forex Trading
 
WMA look more responsive in predicting the trend changes on GBP/USD. Every trend transition points are right at the last candlestick ongoing trend. Also, note in the picture above will happen again trends change from bullish towards bearish. In this case, the selection of proper period was also affecting the precision of the trend determination.

Well, here we already know that the prices weighting in each different time also makes the different value. However, is the weighting methods on WMA is the fastest weighting methods on delivering the trends change? It is not. On Weighted Moving Average (WMA), the weighting is done without including the previous WMA values. In this section, we'll look at moving average method involving exponential functions in doing weighted. The result is the granting of transitional signals can be more early.