Linearly Weighted Moving Average (LWMA)
Candlefocus EditorThe use of a LWMA is similar to other types of moving averages, such as simple moving averages (SMA) and exponential moving averages (EMA). Just like other moving averages, it is used to smooth out short-term price fluctuations and identify long-term trends. It is useful in generating trade signals and suggesting areas of support or resistance.
Unlike an SMA, where each price is assigned the same weight, a LWMA assigns a weight linear to the age of the data point. This means that the most recent data point will have the highest weight and the oldest data point will have the smallest weight. As a result, a LWMA reacts more quickly to short-term price changes than an SMA, making it more suitable for short-term trading.
A LWMA line is created by entering the time period, usually 20 periods, and then using the formula to calculate the weighted average of closing prices from the last 20 periods. As this moving average line is constructed, it can be compared to the price action to identify crossovers. A crossover occurs when the LWMA line travels through the price action. This could be a bullish crossover (the LWMA line going above the price action) or a bearish crossover (the LWMA line going below the price action). These crossovers can be used to generate buy and sell signals.
The LWMA can also be used to identify areas of potential support or resistance. When the price is trading above the LWMA line, then it provides an area of potential support. If the price breaks below the LWMA line, then it could indicate that the trend may be reversed. Conversely, when the price is trading below a LWMA line, then it could indicate resistance.
In conclusion, a LWMA is a powerful indicator and can be used as a tool to more clearly define the price trend and reversals, provide trade signals based on crossovers, and indicate areas of potential support or resistance. Traders who want to reduce the lag of traditional moving averages may find that the LWMA works well for them. It can be used alongside other technical indicators to help improve accuracy when it comes to trade decisions.