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
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
Low Price = The Minimum Value of a Particular Security for the Trading Period under
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.