Weighted Moving Average (WMA)

Weighted Moving Average is still a moving average. And this could be part of the "Moving Averages" lesson. However, I decided to leave it for later (for now), because this indicator is not as popular and helpful as SMA and EMA. But this doesn't mean that WMA is useless. So, let's start the lesson.

The Weighted Moving Average, or WMA, is a type of moving average used by traders to smooth out price data. Unlike simple moving averages, the WMA gives more weight to recent prices. This makes it more responsive to new information and recent price changes.

Traders use the WMA to get a clearer picture of the current trend. Since it reacts faster to price changes, the WMA can help you spot trends early. This can be useful for making timely decisions about when to buy or sell.

How the WMA Works

The WMA calculates the average price over a set number of periods, but it assigns more weight to the latest prices. For example, in a 5-period WMA, the most recent price gets the highest weight, while the oldest price gets the lowest weight. This method makes the WMA more sensitive to recent price movements compared to other moving averages.

Reading the WMA Indicator

• Direction of the WMA Line: If the WMA line is moving up, it suggests an uptrend. If it's moving down, it indicates a downtrend.

• Crossovers: When the price crosses above the WMA, it can be a signal to buy. When the price crosses below the WMA, it can be a signal to sell.

• Slope of the WMA Line: A steeper slope means a stronger trend, while a flatter slope indicates a weaker trend.

Using the WMA Indicator in Tradin

The WMA can be used in several ways to improve your trading strategy:

• Trend Confirmation: Use the WMA to confirm the direction of the trend. If the price is above the WMA and the line is rising, it confirms an uptrend.

• Entry and Exit Points: Look for price crossovers with the WMA to find good entry and exit points. For example, buy when the price crosses above the WMA and sell when it crosses below.

• Combining with Other Indicators: Pair the WMA with other tools like the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) to confirm your trade signals and reduce false signals.

Exercise

Objective: Use the WMA indicator to identify trends and make trading decisions on a crypto pair.

Scenario: Trading ETH/USD on a 4-Hour Chart

1. Set Up the Indicator:

   • Open your trading platform and select the 4-hour chart for the ETH/USD cryptocurrency pair.

   • Add the Weighted Moving Average (WMA) indicator to your chart with a period of 10.

2. Identify the Trend:

   • Look at the direction of the WMA line. If it’s moving upwards, the trend is up. If it’s moving downwards, the trend is down.

3. Find Entry Points:

   • Enter a long position when the price crosses above the WMA line.

   • Enter a short position when the price crosses below the WMA line.

4. Set Stop-Loss Orders:

   • Place a stop-loss just below the WMA for long trades.

   • Place a stop-loss just above the WMA for short trades.

5. Monitor Your Trades:

   • Keep track of your buy and sell decisions based on WMA signals.

   • Note how often these signals lead to successful trades and adjust your strategy if needed.

Good news: you already know more than 90% of traders. This is still not enough to succeed. But you are on the right way.