A:

Moving averages are one of the most popular tools used by active traders to measure momentum. The primary difference between the simple moving average and the weighted moving average is the formula used to create them. For a simple moving average, the formula is the sum of the data points over a given period divided by the number of periods. For example, the closing prices of Apple Inc (AAPL) from June 20-26, 2014 were as follows:

Date

Closing Price of AAPL

June 26

$90.90

June 25

$90.36

June 24

$90.28

June 23

$90.83

June 20

$90.91

A 5-period moving average, based on the prices above, would be calculated using the following formula:

(P1+P2+P3+P4+P5)/5

P = Period

($90.90+$90.36+$90.28+$90.83+$90.91)/5 = $90.656

Based on the equation above, the average price over the period listed above was $90.66. Using moving averages is an effective method for eliminating strong price fluctuations. The key limitation is that data points from older data are not weighted any differently than data points near the beginning of the data set. This is where weighted moving averages come into play.

Weighted averages assign a heavier weighting to more current data points since they are more relevant than data points in the distant past. The sum of the weighting should add up to 1 (or 100%). In the case of the simple moving average, the weightings are equally distributed, which is why they are not shown in the table above.

For example:

Date

Closing Price of AAPL

Weighting

June 26

$90.90

5/15

June 25

$90.36

4/15

June 24

$90.28

3/15

June 23

$90.83

2/15

June 20

$90.91

1/15

The weighted average is calculate by multiplying the given price by its associated weighting and then summing the values. In the example above, the weighted 5-day moving average would be $90.62.

Calculation

((90.9*(5/15))+(90.36*(4/15))+(90.28*(3/15))+(90.83*(2/15))+(90.91*(1/15)))

In this example, the recent data point was given the highest weighting out of an arbitrary 15 points. You can weigh the values out of any value you see fit. The lower value from the weighted average above relative to the simple average suggests the recent selling pressure could be more significant than some traders anticipate. For most traders, the most popular choice when using weighted moving averages is to use a higher weighting for recent values. (For more information, check out the Moving Average Tutorial)

RELATED FAQS
  1. What is the difference between Exponential Moving Average (EMA) and Weighted Moving ...

    Read about the difference between exponential moving averages and weighted moving averages, two smoothing indicators that ... Read Answer >>
  2. What is the difference between a simple moving average and an exponential moving ...

    The only difference between these two types of moving average is the sensitivity each one shows to changes in the data used ... Read Answer >>
  3. How do I use Excel to calculate a weighted average?

    Learn about the calculation and interpretation of weighted averages, including how to compute a weighted average using Microsoft ... Read Answer >>
  4. Are exponential moving averages more effective than simple or weighted moving averages?

    Learn about different types of moving averages, as well as moving average crossovers, and understand how they are used in ... Read Answer >>
  5. What are the main advantages of using Moving Averages (MA)?

    See why moving averages have proven to be advantageous for traders and analysts and useful when applied to price charts and ... Read Answer >>
  6. What is a common strategy traders implement when using the Weighted Alpha?

    Learn how traders and investors use weighted alpha to identify momentum of a stock's price and whether prices will move higher ... Read Answer >>
Related Articles
  1. Trading

    Weighted Moving Averages: The Basics

    We take a closer look at the linearly weighted moving average and the exponentially smoothed moving average.
  2. Trading

    Do Adaptive Moving Averages Lead To Better Results?

    These complex indicators can help traders interpret trend changes, but are they too good to be true?
  3. Trading

    Simple Moving Averages Make Trends Stand Out

    The moving average is easy to calculate and, once plotted on a chart, is a powerful visual trend-spotting tool.
  4. Investing

    S&P 500 ETFs: Market Weight Vs. Equal Weight

    Both indexes include the same stocks, but their weightings give them very different properties.
  5. Trading

    How To Use A Moving Average To Buy Stocks

    The Moving Average indicator is one of the most useful tools for trading and analyzing financial markets.
  6. Trading

    Use Moving Averages to Buy Stocks

    A moving average constantly updates a stock's average price, but it cannot predict a stock's performance.
  7. Trading

    The 7 Pitfalls Of Moving Averages

    While moving averages can be a valuable tool, they are not without risk. Discover the pitalls and how to avoid them.
  8. Investing

    Using Moving Averages to Buy ETFs

    Learn how to use moving averages to enter and exit trades in ETFs, and understand some popular technical setups using moving averages.
  9. Insights

    The Consumer Price Index

    Find out how this economic measure can help you make key financial decisions.
  10. Trading

    Simple Vs. Exponential Moving Averages

    These technical indicators help investors to visualize trends by smoothing out price movements.
RELATED TERMS
  1. Weighted Average

    An average in which each quantity to be averaged is assigned ...
  2. Weighted

    A mathematical process by which figures and/or components are ...
  3. Linearly Weighted Moving Average

    A type of moving average that assigns a higher weighting to recent ...
  4. Portfolio Weight

    The percentage composition of a particular holding in a portfolio. ...
  5. Weighted Average Credit Rating

    The weighted average of all the bond credit ratings in a bond ...
  6. Simple Moving Average - SMA

    A simple, or arithmetic, moving average that is calculated by ...
COMPANIES IN THIS ARTICLE
Trading Center