The parameter "Weighted Alpha" is a technical indicator mainly used in trading of financial instruments such as stocks. Alpha is a measurable way to evaluate the performance of an investment against a market index. A positive alpha means that the investment performs better than the market index, while a negative alpha means that it performs worse.

"Weighted alpha" is a variant of alpha that takes into account not only the performance but also the volatility - i.e. the fluctuation in price - of an investment. In doing so, the more recent alpha is given more weight - hence the name "weighted alpha."

In concrete terms, this means that if an investment has a stronger alpha in the recent past, it is given more weight when calculating the overall alpha.

The concept of "weighted alpha" is used to forecast the potential future performance of an investment. If an investment has a strong alpha in the recent past, this could indicate that this investment will perform just as strongly in the future.

What are the calculation methods?

Weighted Alpha is less standardized than, for example, the Moving Average or the RSI. There are different methods that are used to calculate the indicator. One possible approach would be to use a weighted regression analysis to determine the trend of a stock over a period of time.

For this, a simple sample example:

Suppose we have a stock with the following closing prices over 5 days:

• Day 1: 100€ 
• Day 2: 105€ 
• Day 3: 103€ 
• Day 4: 104€
• Day 5: 108€

For the example, we use a simple and easy to follow weighting system for demonstration. We assume that the most recent tag gets the highest weight and the oldest tag gets the lowest, as shown below: 

• Tag 1 Weight: 1 
• Tag 2 Weight: 2 
• Tag 3 Weight: 3 
• Tag 4 Weight: 4 
• Day 5 Weight: 5

The weighted average based on the assumptions made would be calculated as follows:

(1×100 + 2×105 + 3×103 + 4×104 + 5×108) ÷ (1+2+3+4+5) = 1.575 ÷ 15 = 105€

The weighted average price over the 5 days is therefore 105€. If this average price is higher than the closing price of the first day (100€ in our example), this indicates a uptrend and the Weighted Alpha would be positive. If it is lower, the Weighted Alpha would be negative.

In our example, the Weighted Alpha is: 105€ - 100€ = 5€

Please note that this is a very simple method for illustration. In practice, the Weighted Alpha can be calculated using more complex statistical models and larger amounts of data. 

In summary, the Weighted Alpha is determined by the following factors:

Upward trend of price movement: A key factor is that the more recent price movements of a stock or other security tend to be higher than the older ones. This means that the value of the security has increased over the time period under consideration.

Strength of Recent Trend: Since Weighted Alpha weights recent price movements more heavily than older ones, a strong recent uptrend will have a greater impact on a positive Weighted Alpha.

Weighted Time Span: The time span over which the Weighted Alpha is calculated can have an impact on whether it is positive or negative. Even if a security has had a downward trend over a longer period of time, it may have shown an upward trend over a shorter period of time, which would result in a positive Weighted Alpha.

Weighted Method: The specific method or formula used to weight price movements can also have an impact on how much recent price movements affect the Weighted Alpha.

Basically, a positive Weighted Alpha indicates that a security has experienced an upward trend in the recent past, especially if that trend is stronger than price movements in the more distant past.

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Tip: Weighted Alpha Dashboard

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