Trend Indicator – Moving Averages – Closing Price (Weighted)
The weighted moving average is the weighted average of closing prices. Sharechart uses volume to weight the prices; this gives a more accurate and valid indication of price movements.
Moving averages do not predict a change in the trend, but rather they follow behind the current trend. They are therefore best suited to trend identification and trend following purposes, not prediction.
As moving averages follow the trends they work best when a security is trending and are not effective when a security is moving within a range. Keeping this in mind traders and investors should first identify securities that are trending before analysing with moving averages.
To interpret the moving averages for trading and investing purposes, a buy signal is generated when the fast moving average has crossed the slow moving average and is moving above the slow moving average.
A sell signal is generated when the fast moving average has crossed below the slow moving average and is moving below the slow moving average. This is known as the double moving average crossover with the idea being that the slower moving average is more responsive to price movement, and so acts as the signal to buy or sell. The longer moving average acts as a stable base against the security.
Shorter length moving averages are more sensitive and identify new trends earlier, but also give more false alarms. Longer moving averages are more reliable but only pick up the big trends.
It is best to use a moving average that is half the length of the cycle that you are tracking. If the peak-to-peak cycle length is roughly 40 days then a 20-day MA is appropriate.
Sharechart Default: 5 period, 10 period, 15 period
The setting for the Weighted Moving Averages for the graph above was 5 and 13 periods. It can be modified: Settings > Indicators > Weighted Moving Average Group 1 or Weighted Moving Average Group 2.