Welles Wilder Smoothing

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Introduction

Today traders can be easily overwhelmed with market information and trading tools that are available with a snap of their finger. To be successful in today’s market place, you need to see through all the market noise that occurs on a daily basis and be able to identify the trend of prices. One of the best ways to eliminate market noise is use technical trading indicators that identify the beginning and ending of price trends. Traders use moving averages to smooth out the price volatility to help them analyse price trends. Smoothing of price data can eliminate some of the market noise and allow you to focus on trading.

Wilder’s Smoothing indicator was developed by Welles Wilder and mentioned in his book” New Concepts in Technical Trading”. Wilder used the Smoothing indicator as a component in several of his other indicators including the RSI. Wilder’s Smoothing indicator can be used in the same capacity as other moving averages. The smoothing indicator is used as an input in Wilder’s other indicators such as the RSI, Wilder’s Swing Indicator and Wilder’s Volatility Indicator.

Formula

  1. Calculate a simple moving average (SMA).
  2. Add the previous day’s Wilder Smoothing Value to difference between the close and the previous day’s smoothing value divided by the period.

Smoothing today = smoothing previous + (today’s close – previous day’s smoothing value) / period

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Interpretation

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.

Conclusion

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.