Moving averages play a crucial role in various trading strategies as they help identify trends and potential entry and exit points. The Hull Moving Average (HMA) is a unique moving average that aims to reduce lag while still providing accurate signals.
What is Hull Moving Average?
The Hull Moving Average (HMA) is a type of moving average that aims to reduce lag compared to traditional moving averages. It was developed by Alan Hull in 2005 and is known for its ability to accurately identify trends and reversals in price action.
So, what distinguishes the HMA from other MAs? Unlike standard moving averages, the HMA is constructed by using two different periods of weighted moving averages and can react to price changes quickly. This reduces lag time and delivers a more accurate picture of current market circumstances.
Hull Moving Average Calculation
For calculating the HMA you have to first calculate the WMA of 2 different periods. First, you need to calculate the weighted moving averages (WMA) of two different periods. The first WMA is a half-period, while the second is a full-sized period.
Once you’ve calculated these two WMAs, you can use the formula that’ll produce the HMA:
HMA = WMA(2 * WMA(n/2) – WMA(n)), sqrt(n)),
where:
n is your chosen period,
WMA is a weighted moving average,
sqrt denotes the square root function.
Usually, many trading platforms come pre-loaded with useful HMA indicators, that you can use. Yet, studying the HMA’s mathematical foundation might offer you an advantage when it comes to understanding the indicator and making sound trading decisions.
To calculate the 20-period Hull Moving Average (HMA), you need to:
- Calculate the 10-period WMA for the last 4 periods.
- Calculate the 20-period WMA for the last 4 periods.
- Use the formula mentioned earlier, substituting the values of WMA(10) and WMA(20), and the period of 20, to calculate the HMA.
Following these steps should enable you to compute the HMA for any desired period.
How HMA works
The Hull Moving Average can be implemented on a chart through any trading platform that has support for the indicator. It is typically found under the Moving Average category. Once the HMA has been added to the chart, traders can tweak the settings based on the prevailing market conditions.
One can modify the number of periods used to calculate the moving average to make adjustments to the HMA. The default value is usually set to 14 periods, but traders can modify this figure based on their trading strategy and the market volatility they are trading in.
In general, a shorter period will lead to a faster-moving average that is more responsive to price fluctuations, while a longer period will result in a slower-moving average that is less susceptible to price movements. Traders should conduct experiments with various settings to discover the optimal setup for their trading strategy.
It is vital to bear in mind that the HMA is most effective when used in conjunction with other technical indicators and price action analysis. Traders must not rely solely on the HMA for trading signals but rather utilize it as a tool to corroborate other technical indicators and price action signals.
How to use Hull Moving Average in Trading Strategies
Hull moving averages can be used in different ways to generate trading signals.
Identifying Support and Resistance Levels
The Hull Moving Average can assist in identifying critical support and resistance levels. When the price is above the HMA, the market is said to be in an uptrend, and the HMA can serve as a support level. When the price falls below the HMA, the market is said to be in a downtrend, and the HMA can act as a resistance level.
Identifying the Trend Direction
One of the most popular ways to use the Hull Moving Average is to identify the trend. When the HMA is rising, it indicates an uptrend, and when it is falling, it indicates a downtrend. Trading in the direction of the trend can be done using this information.
Entry signals
The Hull Moving Average can generate entry signals as well. For example, when the price crosses above HMA, it can be interpreted as a buy signal, and when the price crosses below the HMA, it can be interpreted as a sell signal.
HMA crossover
Another way is to use HMA to look for crossovers between the two different periods of HMA. When short-period HMA crosses above the long-period HMA, it can be a signal to buy, and when it crosses below, it can be a signal to sell.
Combining HMA with another type of moving average indicator
By combining the Hull Moving Average with other types of moving average indicators, traders can potentially generate more reliable trading signals. For example, using the HMA in combination with the Simple Moving Average can help filter out false signals and provide a clearer indication of the trend.
Similarly, combining the HMA with the Exponential Moving Average can help traders identify market reversals and potentially improve their entry and exit points.
Hull Moving Average Trading Strategies
Hull Moving Average can be used in different trading strategies depending on the market conditions and the trader’s preference. Here are some of the most common strategies that can be used with HMA:
Trend following
In this strategy, traders use HMA to identify the trend direction and enter trades in the direction of the trend. Traders can use the Hull Moving Average crossover with price as a signal to enter a trade.
Mean reversion
In this strategy, Traders can use the Hull Moving Average to identify support and resistance levels and enter trades when the price is near these levels. When a security price touches the support level, a trader can go long and expect that the price will move to mean value. Conversely, when the price touches the resistance level, a trader can go short and expect that price will move down to mean value.
Breakouts
In this strategy, traders can use the HMA to identify support and resistance levels and enter trades when the price breaks above or below these levels. When an asset price breaks the resistance level, a trader can go long and expect the uptrend continuation. Conversely, when the price breaks the support level, a trader can go short and expect a downtrend continuation.
Traders can also combine HMA with other indicators, such as MACD and RSI, to create more advanced strategies.
HMA vs. other moving average indicators
When comparing Hull Moving Average to other moving average indicators, there are several key differences to consider. One of the most significant differences is the Hull Moving Average’s ability to reduce lag.
Other moving averages, such as Simple Moving Average (SMA) and Exponential Moving Average (EMA), can experience significant lag, making them less accurate when analyzing market conditions.
In contrast, Hull Moving Average is designed to reduce lag, allowing it to provide more accurate signals when identifying trends and potential entry and exit points. The MA accomplishes this by utilizing weighted moving averages, which place greater emphasis on recent price movements. HMA lag is further reduced by calculating the difference between half-period WMA and full-period WMA, which smoothes up the noise and focuses on recent price values. The last step of reducing lag is calculating the squeure root-period WMA of this difference.
Hull Moving Average is well-suited for trend-following strategies. By reducing lag and providing more accurate signals, traders can use the HMA to identify trends and make informed trading decisions. This is particularly useful for traders who prefer to follow trends and make trades based on the direction of the market.
Despite its advantages, Hull Moving Average may not be suitable for all market conditions. In choppy or ranging markets, HMA may produce false signals, leading to potentially costly trading decisions.
Conclusion
Hull Moving Average is designed to reduce lag and provide a smoother line than other moving averages. Trends, entry, and exit points can be identified more easily in this way. However, it also has its limitations and should be used in conjunction with other indicators and proper risk management techniques.
By understanding the calculation and interpretation of HMA, traders can incorporate it into their trading strategies to potentially improve their overall results.
FAQ
Q: How do I calculate the HMA?
A: The HMA is calculated using weighted moving averages, which take into account the closing prices of the security over a certain period. The formula for the HMA is complex, but many online calculators and trading platforms can automatically calculate the indicator for you.
Q: Can the HMA be used for all types of securities?
A: Yes, the HMA can be used for all types of securities, including stocks, bonds, commodities, and currencies.
Q: What is the best time frame to use for the HMA?
A: Determining the optimal time frame for utilizing the HMA hinges on your trading style and the market conditions at hand. Some traders favor shorter time frames, such as 5-minute or 15-minute charts, while others prefer lengthier time frames, such as daily or weekly charts.
