Weighted Close – Strategy, Rules, Returns
Trading smart involves using the right tools to analyze the markets more effectively, and which tool reflects the price action than the Weighted Close. What do you know about Weighted Close in trading?
In trading, Weighted Close is a technical analysis tool that approximates the average price traded in a chosen timeframe. It is similar to Typical Price in that it is an average of the high, low, and close prices of the chosen timeframe, but Weighted Close, as the name implies, places greater weight on the close price — the close price is doubled.
In this post, we will take a look at most of the questions you may have about this indicator: what it is, how it works, and how you can improve your trading strategies with it. Let’s dive in!
Key takeaways
- Weighted Close is a technical analysis tool that is used to get an average of the price data in a chosen timeframe.
- Weighted Close, as the name implies, places greater weight on the close price — the close price is doubled.
- Weighted Close = [High + Low + (Close x2)]/4.
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What is Weighted Close in trading?
In trading, Weighted Close is a technical analysis tool that is used to get an average of the price data in a chosen timeframe. It is similar to Typical Price in that it is an average of the high, low, and close prices of the chosen timeframe, but Weighted Close, as the name implies, places greater weight on the close price — the close price is doubled.
The indicator approximates the average price traded during a chosen timeframe and, thus, can act as a filter to reduce market noise. By taking into account Highs and Lows along with the Close prices, the indicator offers better price data than the usual Close price alone, smoothening out irregularities of the price data.
Weighted Close values are normally plotted on the price chart as a line, which usually runs through the price bars. Traders and analysts use the Weighted Close data to get their preferred moving average line (or even other indicators) for the analysis of the market trend. Using the Weighted Close, rather than the normal close price, factors in the high and low prices, just like it does when using Typical Price.
How is Weighted Close calculated?
Weighted Close is calculated by adding the High, Low, and twice the Close price for any given timeframe (price bar) and, then, dividing the sum by 4. Basically, it is the average of the high, low, and twice the close price for the chosen timeframe/period.
The formula is given as follows:
Weighted Close = [High + Low + (Close x2)]/4
Here are the steps to follow when calculating the weighted close indicator:
- Choose the timeframe you want to trade on.
- For each price bar, add the high, low, and twice the close price.
- Divide the total in step 2 above by 4 to get the weighted close for that price bar.
- Repeat steps 2 and 3 for the next price bar and so on.
Weighted Close trading strategy – trading rules, settings, backtest, returns, and performance
Let’s test the indicator. The only way to determine whether it has predictive power is to make quantified trading rules and backtest it.
We make the following trading rules:
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We apply the trading rules above to the stocks in the S&P 500 from 1990 until today. Current and past stocks are included, so there are no problems with survivorship bias. We allocate 20% of our equity for each position. Commissions of 0.03% per trade are included (0.06% for a roundtrip).
The equity curve looks like this:
The best years were before the financial crisis in 2008/09.
Trading performance metrics and statistics:
- Number of trades: 4819
- Average gain per trade: 0.9%
- Annual returns: 23%
- Win rate: 67%
- Time spent in the market: 72%
- Risk-adjusted return: 32%
- Max drawdown: 43%
The returns are great, but can you deal with this drawdown?
Here is the complete code (Amibroker)
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Why use Weighted Close over other price averages?
You use Weighted Close over other price averages because it gives more weight to the close price, which is often considered the most important price data in any price bar. Other price averages, such as Typical Price and Median Price do not give any special consideration to the close price, which is why Weighted Close is preferred over them by some traders.
Weighted Close is also better than using the close price alone, as that would ignore other price data — the high and low prices. When used to plot other indicators, the weighted close price brings in more reliable price data that considers every part of the price bar and still puts more emphasis on the close price.
What are the benefits of Weighted Close?
The benefits of Weighted Close include:
- It factors in all the key price data in a price bar — the close, high, and low prices — just as the Typical Price does.
- It smoothens out irregularities in the price data since it uses all key price points.
- It gives more weight to the closing price than the high and low prices, thereby emphasizing the importance of the close price.
- It gives analysts the best of both sides — all key price data in a price bar and more emphasis on the close price — when looking for the price data to use for other indicators like moving averages.
How does Weighted Close improve trading accuracy?
Weighted Close improves trading accuracy by offering you the best of both sides — all key price data in a price bar and more emphasis on the close price — when looking for the price data to use in creating other indicators like moving averages. Using the close price alone ignores other key price data, like the high and low prices, of a price bar. On the other hand, using other averages like the Typical Price or Median Price would not consider the preeminence of the Close price over other key price data. Thus, the use of Weighted Close offers the best of both sides.
What is the formula for Weighted Close?
The formula for Weighted Close is given as follows:
Weighted Close = [High + Low + (Close x2)]/4
It basically involves adding the High, Low, and double of the Close price for the chosen timeframe (price bar) and, then, dividing the sum by 4. This gives you the average of the high, low, and double the close price for the chosen timeframe.
How is Weighted Close different from a simple moving average?
Weighted Close is different from a simple moving average in that it is the average of the price data of a single timeframe (price bar), while a simple moving average is the average of any chosen price data (close, high, low, Typical Price, Median Price, or Weighted Close) over a given period, which usually comprises of several price bars.
In other words, Weighted Close is just a type of price data, which can then be used to get a simple moving average over the chosen period. A daily Weighted Close is a close-weighted average price for the daily price bars, whereas a 10-day simple moving average is the average of the chosen daily price data over 10 trading days — the chosen price data for the moving average can be the Weighted Close.
Can Weighted Close be used in day trading?
Yes, Weighted Close be used in day trading as long as it is obtained for the price bars of the timeframes suitable for day trading. Suitable timeframes for day trading are usually the hourly, 30-minute, and 15-minute timeframes. You can get the weighted close of any of these preferred day trading timeframes and use it for your analysis. For instance, if your strategy is to use a 20-period moving average to identify the trend on the hourly timeframe, you can get the 20-period moving average using the Weighted Close (instead of just the close, high, low, or typical price) of the hourly price bars.
How does Weighted Close compare to the exponential moving average?
Compared to the exponential moving average, Weighted Close is just another price data of price bar, just like the close, high, low, Typical Price, or Median Price, while the exponential moving average is the average of any of those price data over a chosen period, which usually comprises of several price bars.
Weighted Close is obtained by averaging the high, low, and double the close price of a single price bar to obtain a unique price data for that price bar, which can then be used to calculate an exponential moving average.
While the exponential moving average (EMA) gives more weight to recent price bars and Weighted Close gives more weight to the close price, they focus on two different things — Weighted Close focuses on getting a unique price data of a single price bar, whereas the EMA focuses on getting the exponential average price over several price bars.
What are the components of Weighted Close?
The components of Weighted Close are as follows:
- The low price: This is the lowest level a price bar traded for the chosen timeframe.
- The high price: This is the highest level a price bar traded for the chosen timeframe
- The close price: This is the price level the price bar closed for the chosen timeframe. In the Weighted Close calculated, this is given a double weighting compared to the high and low prices.
How does Weighted Close react to market volatility?
Weighted Close reacts to market volatility like any other price data in a price bar. If the market is volatile and spiking about with every new price bar, the Weighted Close will also be spiking around. The indicator only gets a weighted average point of the price data of every individual price bar; it does not give a smoothened average over several periods. It shows what a price bar did in a trading session but emphasizes the close prices. If the overall price action has a trend, the weighted close will also follow the trend. But if the price action is sideways, the weighted close will also move sideways.
Is Weighted Close suitable for all asset classes?
Yes, Weighted Close is suitable for all asset classes since it is simply another price data for any price bar. Being a form of price data and calculated solely from the price points of a price bar, Weighted Close can be used on any financial asset class, as long as the historical and current price data are available. It will not be suitable for the spot forex market if it is based on volume data since the spot forex market doesn’t have reliable volume data. Having said that, you should know that the indicator performs better in clearly trending markets.
What are the limitations of Weighted Close?
The limitations of Weighted Close include:
- It is only another form of price data — albeit a unique and useful one — so, it is used to calculate other indicators.
- Its usefulness is limited to how useful the indicators it is used to create are
- It cannot be used to formulate a trading strategy on its own
- It has to be calculated as an indicator if it is not provided by trading platforms as another type of price data, just like Typical Price.
How can beginners implement Weighted Close?
To implement Weighted Close, beginners have to understand that it is only another form of price data they can use to calculate their preferred indicators. In some trading platforms, such as MT4 and MT5, certain indicators like the moving averages have Weighted Close as one of the options to apply the indicator. So, they can use such indicators to create their trading strategies — every strategy must have clear entry and exit criteria and risk management parameters.
How does Weighted Close affect trading signals?
Weighted Close affects trading signals by calculating the signals based on its unique price data, rather than the usual close price or typical price used for most indicators. When the weighted close is used to calculate an indicator, the signals will be based on the weighted close data. Given the usefulness of this unique data, the trading signals may perform better if the market conditions are favorable. In an unfavorable market, using the weighted close data may not make much of a difference.
What tools can calculate Weighted Close?
The tools that can calculate Weighted Close are indicators specifically coded to calculate it if it is not already built into a trading platform. In some trading platforms, such as MT4 and MT5, Weighted Close is provided as one of the price data options for some of the built-in indicators like the moving average. If your trading platform does not calculate the weighted close, get an indicator that calculates it.
How to interpret Weighted Close in trading charts?
To interpret Weighted Close in trading charts, you should consider the overall price action or analyze the movement of the indicator the weighted close is used to calculate. How you do that will depend on your trading strategy. But generally, if the Weighted Close is close to the high of the price bar, it means that the buyers were in control of the period that the price bar was printed, and if it is close to the low of the bar, it means that sellers were in control of the period.
Can Weighted Close be combined with other indicators?
Yes, Weighted Close can be combined with other indicators. But not just that; being a form of price data, just like the typical price, it is usually used to calculate other indicators, such as the moving average indicator. As a price indicator, it can also be combined with price action analysis to know who is dominating the market in any given trading period it represents. For instance, if, in an uptrend, the price pulls back to a support level, you can check the location of the Weighted Close for consecutive price bars. If it is consecutively close to the highs of the price bars, it could mean that the pullback is reversing and you may decide to go long.
How often should Weighted Close be recalculated?
Weighted Close is recalculated for every price bar printed on the price chart. It is just another form of the price data for any price bar — like the high, low, close, median, and typical prices. So, for any price bar that prints, Weighted Close can be calculated the same way Typical Price can be calculated from any price bar.
What historical data is needed for Weighted Close?
The historical data needed for Weighted Close are the price bars on the chart. Every price bar consists of the high, low, and close prices, which are the data points needed to calculate the weighted close for that price bar. So, for each historical price bar you have, you can calculate its weighted close and use it for whichever analysis you want — price action analysis or indicators.
How does Weighted Close influence trading decisions?
Weighted Close can influence trading decisions since it can be the input price data for many trading indicators, as well as the price point of reference in price action analysis. In the MT4 platform, for example, technical indicators that usually have the option of using Weighted Close as the price data for their calculation include simple moving average, exponential moving average, Bollinger Bands, Average Directional Index, Standard Deviation, and most other trend indicators.
What platforms support Weighted Close calculations?
Platforms that support Weighted Close calculations are many, including the two MetaTrader platforms — MT4 and MT5 — which provide Weighted Close as one of the price data options an indicator can be applied to. Other platforms include thinkorswin, TradeStation, and Incredible Charts. For platforms like TradingView, it is available as an indicator that can be applied to the indicator window.
How can Weighted Close help in trend analysis?
Yes, Weighted Close can help in trend analysis if used the right way. You can use it as the price data for your moving average indicators, which you then use for your trend analysis. Using the Weighted Close for your moving average allows you to factor in all the key price points — high, low, and close prices — in your analysis while putting more weight on the close prices. If you use pure price action analysis, you can still use the Weighted Close as your price data of reference, instead of the close price alone, for each price bar.
What are common mistakes with Weighted Close?
Common mistakes with Weighted Close include:
- Not realizing that it’s just another form of price data you can use to calculate other indicators or as a reference for your price action analysis.
- Using it as an indicator on its own for making trading decisions.
- Not formulating a clear strategy for indicators created with it, as its usefulness is limited to how useful the indicators it is used to create are.
- Trading without a risk management plan.
How to customize Weighted Close for your strategy?
To customize Weighted Close for your strategy, you need to understand what it is so you can use it more effectively. Although, in some platforms, the weighted close is available just as an indicator, it is actually another form of price data you can use as a reference for price action analysis or to calculate real indicators, like moving averages, which you can then use for your analysis. It is the indicators or your price action analysis that you can formulate your customized strategy with.
For instance, the strategy can be this: when the price is in an uptrend and pulls back to a support level, you check the location of the Weighted Close for two consecutive price bars. If it is consecutively close to the highs of the price bars, then, the pullback is reversing, and it is time to go long.