The Smoothed Hull Moving Average (HMA) is a technical indicator developed by Alan Hull designed to offer a more responsive and smoother representation of price trends compared to traditional moving averages, reducing lag and helping traders better isolate market trends.
Let’s dive into how the HMA works, its uses in trading strategies, and answer some frequently asked questions.
What is the Hull Moving Average (HMA)?
The HMA is a type of weighted moving average (WMA) that aims to significantly reduce lag compared to traditional Simple Moving Averages (SMAs) or Exponential Moving Averages (EMAs).
It achieves this by incorporating multiple weighted average calculations and applying a square root function for additional responsiveness.
Why Use the Smoothed Hull Moving Average?
The Smoothed Hull Moving Average (HMA) offers traders several advantages over traditional moving averages. Foremost is its reduced lag.
Since the HMA reacts to price changes more swiftly, it can highlight shifts in the dominant trend earlier. This allows traders to potentially enter trades before a new trend is widely recognized, and exit positions sooner when a trend begins to weaken.
Moreover, the HMA’s smoother nature helps filter out some of the “whipsaws” that often occur with more basic moving averages. For instance, a traditional SMA might generate a false buy signal as price briefly dips below it, only to quickly reverse. Since the HMA is less likely to whipsaw around the current price, it can lead to fewer false signals when the underlying trend remains intact.
Here are the main advantages of HMA:
- Reduced Lag: The HMA’s primary advantage is its ability to react to price changes more quickly, providing traders with potentially earlier signals.
- Smoother Trend Representation: The HMA’s weighting mechanisms help filter out some market noise, visualizing the prevailing trend with greater clarity.
- Versatility: The HMA is applicable across various timeframes and markets, including stocks, forex, and commodities.
Absolutely! Let’s delve into the various ways to incorporate the Smoothed Hull Moving Average (HMA) into your trading strategies:
How to Use the Smoothed Hull Moving Average (HMA) in Trading
Here are the primary applications of the HMA, with examples to illustrate their use.
Trend Following
The basic Principle of the trend follow trading is based on The direction and slope of the HMA line.
A buy Signal happens when HMA turns upward and crosses above price.
HMA continues an upward slope (color change to green on many platforms further confirms this).
A sell Signal happens when HMA turns downward and crosses below price.
HMA continues a downward slope (often a color change to red).
Example: If the HMA is rising and the price is consistently above it, this suggests a bullish trend. Conversely, a falling HMA with price mostly below it signals bearish momentum.
HMA Crossover Strategies
Crossovers between HMAs of different lengths can generate trade signals, similar to traditional moving average crossovers.
A buy Signal generates when A shorter-period HMA (e.g., 20-period) crosses above a longer-period HMA (e.g., 50-period). This signals potential bullish momentum.
A sell Signal generates when A shorter-period HMA crosses below a longer-period HMA, indicating potential bearish momentum.
Example: A 20-period HMA crossing above a 50-period can be a buy signal, especially if aligning with the broader market trend.
The HMA as a Confirmation Tool
The HMA is excellent when combined with other indicators or price analysis techniques for additional trade confirmation.
Combining With RSI
Look for bullish divergence: Price making a lower low, but RSI making a higher low, followed by an HMA turning upwards.
Watch for bearish divergence: Price making a higher high, RSI making a lower high, with a subsequent downward turn of the HMA.
Combining With Price Patterns
Confirm breakouts from triangles, channels, or head and shoulders patterns with a corresponding HMA move in the breakout direction.
Example: If price breaks above a resistance level, and the HMA simultaneously turns upward, it provides stronger confirmation of a trend change.
Important Considerations
Always consider the broader trend: HMA signals are most reliable when aligned with the prevailing market direction.
No indicator is perfect. Be prepared for false signals, especially in choppy markets.
Experiment with different HMA periods to find settings that suit your trading style and the specific instruments you trade.
Smoothed Hull Moving Average Indicator Formula
The HMA calculation is slightly more complex than traditional moving averages:
- Calculate a Weighted Moving Average (WMA): [Sqrt(Period) WMA1] – [(Period-Sqrt(Period)) WMA2]
- WMA1 = WMA of (2 Half-Period Close) – (Period * Close)
- WMA2 = WMA of Close (over full period)
- Apply Another WMA: WMA of the result from the previous step (over ‘half-period’).
Note: ‘Period’ refers to the number of bars (candlesticks) used in the calculation, and ‘Half-Period’ is half of this value. The ‘Sqrt’ function represents the square root.
Smoothed Hull Moving Average Calculation Steps
While trading platforms automatically display the HMA, understanding the steps is beneficial:
- 1st WMA: Calculate a WMA where the input is twice the ‘half-period’ average minus the ‘period’ average.
- 2nd WMA: Calculate another WMA using the full ‘period’ as the lookback.
- Difference: Subtract ‘Period – Square Root of Period’ multiplied by the 2nd WMA from ‘Square Root of the Period’ multiplied by the 1st WMA.
- Final WMA: Calculate a WMA using a ‘half-period’ lookback on the result of step three.
How to Use the Smoothed Hull Moving Average in Trading
Here are common strategies incorporating the HMA indicator:
Trend Following with the HMA
- Buy Signal: HMA line turns upward and crosses above price.
- Sell Signal: HMA line turns downward and crosses below price.
- Trend Confirmation: Use the HMA’s slope and color changes (many platforms offer color shifts) to gauge trend strength.
HMA Crossover Strategies
- Buy Signal: A shorter period HMA crosses above a longer period HMA.
- Sell Signal: A shorter period HMA crosses below a longer period HMA.
Using the HMA for Confirmation
- Combining with RSI: Look for bullish RSI divergence (price making lower low, RSI making higher low) confirmed by an upward HMA crossover for a potential buy signal.
- With Price Patterns: Use the HMA to confirm breakouts from chart patterns like triangles or head-and-shoulders.
Entry and Exit Rules for HMA Trading Strategies
- Entries: Consider entering trades on confirmed HMA signals in alignment with the broader trend.
- Exits:
- Trend-Following: Exit when the HMA changes direction or a crossover occurs against the trend.
Specific Targets: Set price-based profit targets.
- Stop-Loss Placement: Always use stop-losses to manage risk. Place them below recent swing lows (for buys) or above recent swing highs (for sells).
Customizing the HMA Indicator Settings
Most trading platforms allow customization of the HMA’s period. There’s no single “best” setting. Experimentation based on your timeframe and market is key:
- Shorter periods: More responsive to price changes, potentially generating more signals (both good and bad!).
- Longer Periods: Provide a smoother trend picture, reducing whipsaws but possibly increasing lag.
Combining the HMA with Other Indicators
The HMA works well in conjunction with other technical tools for additional confirmation:
- Momentum Oscillators: RSI, Stochastic Oscillator, or MACD can identify potential overbought/oversold zones and divergences in conjunction with HMA signals.
- Trend Confirming Indicators: Moving averages (like a 50-period SMA) or ADX can help validate the broader trend direction.
- Volatility Indicators: Bollinger Bands or Average True Range (ATR) can assist in determining appropriate stop-loss placement and trade sizing.
Conclusion
The Smoothed Hull Moving Average (HMA) is a valuable addition to a technical trader’s toolkit. Its ability to quickly adapt to price changes and smooth out market noise provides traders with clearer trend signals, potentially leading to better-timed entries and exits.
Remember, like with any indicator, the HMA is best used in combination with sound risk management practices and a broader understanding of market dynamics. Experiment on different markets, timeframes, and in conjunction with other indicators to find what works best within your trading style.
Frequently Asked Questions (FAQs)
Does the HMA eliminate lag altogether?
While the HMA significantly reduces lag compared to traditional moving averages, it doesn’t eliminate it entirely. Some lag is inherent in any moving average-based indicator.
Is the HMA a leading or lagging indicator?
The HMA is primarily considered a lagging indicator, though its reduced lag makes it more responsive within the context of identifying trend changes.
How is the HMA different from other moving averages?
The HMA’s unique calculation involving multiple WMAs and the square root function results in it being smoother and more responsive to changes in price action, aiming to filter out more noise than traditional SMAs or EMAs.
Can I use the HMA on any timeframe?
Yes, the HMA is applicable across short-term, intermediate, and long-term trading timeframes. Adjust the period settings accordingly.
