Weighted Close

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Introduction

Similar in style to Typical Price, Weighted Close Technical Indicator measures the mean change in a security’s price. Weighted Close uses the high, low and closing price to determine the average of a security’s price for one day. The only difference between Typical Price Indicator and Weighted Close Indicator is that the later one places double weight to the Closing Price as is given to the other two i.e. High and Low Price of the day. The basic purpose of Weighted Closed Indicator is to filter Moving Average System. 

Weighted Close Indicator uses Smooth Line to Plot a Price Chart. The Line Chart is very easy to draw and is easy to understand and act as compared to other kind of charts and patterns. Weighted Close is a typical way to view price data. It gives more importance to the closing price by multiplying closing price by 2 in the formulae. High and Low are given equal importance. The outcome of this formula is plotted over a single line chart. A single line Chart gives a precise and concise picture of the market. Weighted Close is frequently used by traders as an indicator to determine Primary Trend. However, it cannot be used or should not be utilized as a Trade Signal generator i.e. using Weighted Close to actuate Buy or Sell Signals. 

Close Price Indicator is also used by some traders to determine the Average Price but Weighted Close has a slight edge over Closing Price. Weighted Close pays double weight to Closing Price which is the main difference between Closing Price and Weighted Close. There isn’t any need to justify the reason behind giving double weight to Closing Price. But, if someone is looking for an answer, Weighted Close uses double figure of the closing price to bring smoothness and simplicity in the calculation and ultimately eases the procedure of interpreting the outcome i.e. Average Price of a security for one day.

High and Low are two extremes which aren’t as important as is the closing price, that’s why Weighted Close multiplies closing price by two to reduce the impact of irregularities i.e. High and Low price.

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Calculation

Weighted Close is determined by using High, Low and Closing Price of a Security during one day. In order to determine Weighted Close, the formula used is; 
Weighted Close = ((Closing Price * 2) + High Price + Low Price) / 4
Where
Closing Price = The Price of a Particular security at the end of a day.
High Price = The Highest Price of a Particular Security for the Trading Period under consideration.
Low Price = The Minimum Value of a Particular Security for the Trading Period under consideration. 

Specifics of Weighted Close

Many Investors prefer using Line Chart due to its simplicity while plotting and Back Testing Moving Averages, Trend lines, and Indicators. Notwithstanding the benefits, Line Charts which display only the Day End Price can be deceptive. Reason behind it is they brush off the high and low prices of a particular security in consideration. The chart of a Weighted Close Indicator is a mix of the Simplicity of a Line Chart and Scope of a Bar Chart because it uses a Single Average Value of the High, Low and Closing Price for each day.

Weighted Close doesn’t generate trade signals i.e. Buy or Sell Signals. Day Traders cannot rely on such Indicator because although it provides a primary trend, it doesn’t result in a definite plan of action. It can only provide a clear, concise yet simple picture of the current trend prevailing in the market. In order to determine trade signals, traders must use other typical trade signal generating techniques like Support/Resistance, Trend Lines, and Chart Patterns etc. Weighted Close can also be used to filter moving averages like identifying Trends. In order to do so, Weighted Close must be compared to a moving average. This will let the trader know when the Trend is moving upward and when it’s going downward. Similarly, Weighted Close anticipates higher trend when prices continue to mount.

The outcome of Weighted Close is an ideal input for indicators which heavily rely on reliable Average Price for each day. Reason behind it is that, Weighted Close provides a more realistic picture of the session than closing price. If we develop a simple moving average on the basis of Weighted Close, then the trend will go like this. If the Moving Average is going up bar by bar but the Weighted Close is staying low as compared to Moving Average then the Trend is Unclear. If the last bar indicates a positive trend then it would retain its place.

Majority of the Traders use Weighted Close with a 21 Day Exponential Moving Average. So, when the Average price of a security when the crosses  the Moving Average from below, a trade signal to buy that particular security is generated and vice versa. It is a proven strategy that can be relied upon, but the problem with it is that it’s a Lagging one. 

Advantages of Weighted Close

  • The Weighted Close Indicator provides a simple yet concise view of the whole day. 
  • Weighted Close applies double weight to Closing Price, which results in a smooth data of the whole trading period. 
  • Although Weighted Close cannot be used to actuate buying and selling yet it can be handy in determining the primary trend. 
  • Weighted Close enhances smoothness in a trading chart. It can be used as a filter for various moving averages including exponential moving average.

Disadvantages of Weighted Close

  • The Formulae of Weighted Close counts the figure of Closing Price twice. Although Closing Price carries more weight then extreme prices like High or Low Price but can be misleading on some occasions.> Weighted Close doesn’t provide Clear Trading Signals. Majority of traders prefer other indicators over Weighted Close only because of its lagging nature. 
  •  In order to generate trade signals, traders must use moving averages along with Weighted Close to determine direction of future trend.