What is a weighted moving average?
When using a moving average method described before, each of the observations used to compute the forecasted value is weighted equally. In certain cases, it might be beneficial to put more weight on the observations that are closer to the time period being forecast. When this is done, this is known as a weighted moving average technique. The weights in a weighted MA must sum to 1.
Weighted MA(3) = Ft+1 = wt1(Dt) + wt2(Dt-1) + wt3(Dt-2)
Example:
- The demand for defense machinery for a certain project is given each month as follows:
| Month | Demand |
| 1 | 120 |
| 2 | 110 |
| 3 | 90 |
| 4 | 115 |
| 5 | 125 |
| 6 | 117 |
| 7 | 121 |
| 8 | 126 |
| 9 | 132 |
| 10 | 128 |
|
The defense officer is asked to forecast the demand for the 11th month using three period moving average technique.
Solution:
- The defense officer has decided to use a weighting scheme of 0.5, 0.3, 0.2 and calculated the weighted moving average for the 11th month as follows.
Weighted MA(3): F11 = 0.5(128) + 0.3(132) + 0.2(126) = 64 + 39.6 + 25.2 = 128.2
For another type of weighted moving average technique, please refer to exponential smoothing.