Linearly Weighted Moving Average
A linearly weighted moving average (LWMA) is a moving average calculation that more heavily weights recent price data. The most recent price has the highest weighting, and each prior price has progressively less weight. The weights drop in a linear fashion. LWMAs are quicker to react to price changes than simple moving averages (SMA) and exponential moving averages (EMA).
Definition:
The Linear Weighted Moving Average (LWMA) is a method of calculating moving averages that places more emphasis on recent price data. The most recent prices have the highest weights, and each preceding price's weight decreases linearly. The LWMA responds to price changes faster than the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
Origin:
The concept of the Linear Weighted Moving Average originated in the field of technical analysis, aiming to provide a more sensitive tool for tracking price trends. Although the exact time and inventor are unknown, its application can be traced back to the mid-20th century when technical analysis became an important method for financial market analysis.
Categories and Characteristics:
1. Simple Moving Average (SMA): Each price data point has the same weight, simple to calculate but slower to respond to price changes.
2. Exponential Moving Average (EMA): Recent price data points have higher weights, but the weights decrease exponentially, with a response speed between SMA and LWMA.
3. Linear Weighted Moving Average (LWMA): The most recent price data points have the highest weights, and the weights decrease linearly, responding to price changes the fastest.
Specific Cases:
1. Stock Trading: Suppose an investor uses LWMA to analyze the short-term trend of a stock. By observing the LWMA trend, the investor can more quickly capture price turning points and make buy or sell decisions.
2. Forex Trading: In the forex market, traders use LWMA to identify short-term fluctuations in currency pairs. Since LWMA responds faster to price changes, traders can adjust their trading strategies more timely, reducing potential losses.
Common Questions:
1. Why choose LWMA over SMA or EMA?
LWMA responds faster to price changes, making it suitable for short-term traders. However, for long-term investors, SMA or EMA might be more appropriate.
2. How to set the period for LWMA?
The choice of period depends on the trader's strategy and market conditions. Generally, short-term traders might choose shorter periods (e.g., 10 days), while medium to long-term traders might choose longer periods (e.g., 50 days).
