Weighted Moving Average (WMA) – What It Is & How to Trade It

Weighted Moving Average (WMA) – What It Is & How to Trade It

What is the Weighted Moving Average (WMA)?

The Weighted Moving Average (WMA) is a type of moving average that assigns more weight to recent prices, making it more responsive to price changes than the Simple Moving Average (SMA). This allows traders to get trend signals faster while still smoothing out price action.

WMA is calculated using the following formula:
WMA = (P1 × W1 + P2 × W2 + … + Pn × Wn) / (W1 + W2 + … + Wn)
Where:

• P represents the price at a given time.
• W represents the weight assigned to each price (higher for recent prices).
• n is the chosen period length.

Key Features of WMA

• More responsive to price movements than SMA by assigning higher importance to recent prices.
• Smooth out price action while still reacting to price changes.
• Helps traders identify trends faster than SMA but less aggressively than EMA.

How to Use WMA in Forex Trading

1. Trend Identification Strategy

WMA helps traders determine the overall market trend:

• If the price is consistently above the WMA, the trend is bullish.
• If the price is consistently below the WMA, the trend is bearish.

Recommended WMA Settings:

• Short-term traders: 10-period WMA for quick signals.
• Swing traders: 50-period WMA for medium-term trend tracking.
• Long-term traders: 100-period WMA to confirm overall market direction.

2. WMA Crossover Strategy

Using two WMAs of different periods generates trade signals:

• Buy Signal: When a short-term WMA (e.g., 20 WMA) crosses above a long-term WMA (e.g., 50 WMA).
• Sell Signal: When a short-term WMA crosses below a long-term WMA.

Best WMA Combinations:

• 10 WMA & 50 WMA: Short-term trading.
• 20 WMA & 50 WMA: Swing trading.
• 50 WMA & 200 WMA: Long-term trend analysis.

3. WMA with MACD Strategy

Combining WMA with the Moving Average Convergence Divergence (MACD) enhances trade confirmation:

• Buy when: WMA shows an uptrend & MACD crossover confirms bullish momentum.
• Sell when: WMA indicates a downtrend & MACD crossover confirms bearish momentum.

Pros and Cons of Using WMA

✅ Pros:

• More responsive to price movements than SMA.
• Helps traders react faster to trend changes.
• Works well in combination with other indicators.

❌ Cons:

• Can generate false signals in choppy markets.
• More sensitive than SMA, which may lead to overtrading.

Final Thoughts

The Weighted Moving Average (WMA) is a powerful forex indicator that provides traders with faster trend signals while maintaining smooth price action. When used correctly, WMA can improve trading accuracy and decision-making.