Weighted Close¶

Definition¶

The Weighted Close (WC) indicator is a technical analysis tool that provides a smoothed measure of a symbol price, reflecting more weight on the closing price compared to the high and low prices. By emphasising the closing price, it helps traders assess market sentiment and identify potential price trends more accurately. This indicator is particularly useful in evaluating price movements over a specific period, aiding in making informed trading decisions.

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History¶

The Weighted Close emerged from the evolution of technical analysis in the late 20^th century, aiming to provide a more accurate reflection of price trends. It gained traction among traders seeking effective analysis methods that incorporated closing prices. Influential texts like John J. Murphy's "Technical Analysis of the Financial Markets" popularised it, solidifying its role in trading strategies.

Calculations¶

The Weighted Close value calculates the average of the high, low and double the closing prices for each period:

\[ WC = { { ( 2 \times Close ) + High + Low } \over 4 } \]

\(Close\) – the closing price of the period

\(High\) – the highest price of the period

\(Low\) – the lowest price of the period

Interpretation¶

• Crossovers – if the WC crosses above a moving average (such as the Simple Moving Average), it may indicate a shift towards bullish momentum. Conversely, a cross below the moving average could indicate a shift in trend towards bearish momentum.

• Rising and falling – the direction of the Weighted Close line can indicate the overall trend of the currency pair. A rising WC suggests bullish momentum, while a falling WC indicates bearish momentum.

• Divergence – when the WC diverges from the price action (for example, prices making new highs while the WC fails to do so), it can signal a potential reversal or weakening trend and alert traders to proceed with caution.

• Reversal points – changes in the direction of the WC may highlight potential reversal points in price trends. A sharp decline in the WC following an uptrend could suggest an impending bearish reversal, while a significant rise after a downtrend might indicate a bullish reversal.

Application¶

• Buy signal – traders can consider entering a buy position when the Weighted Close crosses above a specified moving average (such as the Simple Moving Average).

• Sell signal – conversely, traders can consider entering a sell position when the Weighted Close crosses below a moving average.

• Stop-loss placement – traders might place a stop loss below a recent low or below the WC value if they enter a long position. When entering a short position, traders can place a stop loss above a recent high or above the WC value.

• Exit strategies – an exit strategy could involve selling when the WC indicates a reversal, such as crossing below a moving average after a bullish trend, or when it shows significant divergence from price action.

• Confirming trades – the Weighted Close can be combined with other indicators, such as the Relative Strength Index (RSI) or the MACD, to confirm signals. For instance, a buy signal from the WC, confirmed by a bullish RSI divergence, could strengthen the trade decision.

Limitations¶

The Weighted Close primarily reflects historical price data and may lag behind current market movements, potentially missing real-time shifts in sentiment. Additionally, the indicator is sensitive to price fluctuations, which can lead to misleading signals during volatile market conditions. Traders should use it alongside other indicators for a more comprehensive analysis.

Summary¶

The Weighted Close indicator is designed to provide a refined measure of the currency pair price, incorporating greater weight on closing values to enhance trend analysis. This tool is particularly beneficial for traders looking to gain insights into market sentiment and price movements. Its focus on closing prices allows for better trend identification, making it a valuable addition to any technical analysis toolkit, especially for those emphasising the importance of closing data.