The calculation of Wilder's Smoothing begins with an ‘n’ day simple
moving average of the stock’s closing price. The next step is to construct
a line by adding the previous day's Wilder Smoothing value to the difference between
the close and the previous day's smoothing value divided by the period.
Wilder's smoothing formula uses simple averages for the initial calculation. For
the next step in the calculations drops 1/14th of the previous average value and
add 1/nth of the new value. This is the how the classic exponential average is calculated
using the smoothing factor is 1/n. The modern exponential average uses a smoothing
factor of 2 / (n+1) instead. An n-period Wilder smoothing indicator produces similar
values to a 2n period EMA. For example, a 14-period EMA has almost the same values
as a 7-period Wilder Smoothing indicator.
Wilder's Smoothing indicator is similar to the Exponential Moving Average but responds
slower to price changes than the EMA. The slower response is a function in that
Wilder's Smoothing indicator formula carries a smaller percentage of historical
data in its calculation than the EMA formula. Wilder's Smoothing indicator can be
used in the same manner as other moving averages. Traders typically use Wilder’s
Smoothing indicator to identify trend direction, support, and resistance levels.
Traders can use Wilder’s Smoothing indicator to reduce the noise in the market
and focus on finding and analysing trends. By focusing on trend in price action,
traders can watch to see if a stock’s current trend will continue or they
are look for signs of weakness which alert them to possible trend direction changes.
Like all technical indicators, traders should employ multiple indicators to confirm
trading signals if they want to increase their chance of making profits. Regardless
of what trading indicator and strategy you choose, be sure that it fits your personality
and ability to take risk. Wilder’s Smoothing Indicator is a versatile tool
that can be used by traders to improve their trading results.