Weighted Moving Average (WMA)

What Is a WMA?

How Do WMAs Work?

The WMA assigns a weight to each price point within the selected period, with the most recent prices receiving the highest weights. To calculate a WMA, you multiply each price by its weight, get the sum of these values, and then divide by the sum of the weights.

For example, let’s calculate a 5-day WMA. Suppose the closing prices over the last five days are $10, $11, $12, $13, and $14. The weights assigned to these prices might be 1, 2, 3, 4, and 5, respectively. The WMA is calculated as follows:

WMA = (10 * 1 + 11 * 2 + 12 * 3 + 13 * 4 + 14 * 5) / (1 + 2 + 3 + 4 + 5) = (10 + 22 + 36 + 52 + 70) / 15 = 190 / 15 = 12.67

In this example, the 5-day WMA is $12.67. As new closing prices are added, the oldest prices are dropped from the calculation, and the weights are recalculated, ensuring that the WMA continuously reflects the most recent price trends.

WMAs in Crypto Trading

In crypto trading, WMAs can be used for trend analysis. For instance, if the price of Bitcoin moves above its 50-day WMA, this could signal the beginning of an uptrend, suggesting a potential buy opportunity. In contrast, if the price falls below the 50-day WMA, it may indicate a downtrend, signaling a potential sell opportunity.

Conclusion

Weighted moving averages (WMAs) are technical analysis tools that smooth out price data over a specified period with greater sensitivity to recent price movements. In crypto trading, WMAs are often used to identify trends and support and resistance levels.