A moving average is a simple but powerful tool that can help you identify the trend direction, support and resistance levels, and momentum of a security. It is calculated by taking the average price of a security over a specified number of periods, such as days, weeks or months. By doing so, it smooths out the random fluctuations and noise in the price data and reveals the underlying trend.
There are different types of moving averages that can be used for technical analysis, each with its own advantages and disadvantages. In this blog post, we discuss the Hull Moving Average.
Also see: Moving Averages
Traders often utilize the Hull Moving Average (HMA) as a renowned technical indicator to identify trends in financial markets. Its origin can be traced back to Alan Hull, an Australian trader who introduced it in 2005. By utilizing weighted moving averages and a distinctive calculation approach, the HMA aims to minimize lag and enhance the precision of moving averages.
Conventional moving averages, such as the Simple Moving Average (SMA) or Exponential Moving Average (EMA), are calculated based on the average price over a specific period. Although these moving averages can assist in identifying trends, they often react slowly to shifts in market conditions, and they may generate false signals during periods of high volatility.
The Hull Moving Average addresses this issue by incorporating a weighted moving average that gives more weight to recent price movements. Additionally, the calculation approach takes into account the square root of time, which provides more emphasis on recent price movements while still maintaining a smooth curve.
Computing the Hull Moving Average
The HMA is calculated using the following steps:
1. Calculate the WMA (weighted moving average) of the price for a given period (usually 20 periods).
2. Calculate the WMA of the price for half the period (in this case, 10 periods).
3. Subtract the second WMA from the first WMA multiplied by 2.
Calculate the WMA of the result obtained in step 3 for the square root of the period (in this case, the square root of 20).
The resulting value is the HMA.
The formula for the HMA is as follows:
HMA = WMA(2*WMA(n/2) - WMA(n)), sqrt(n))
WMA(n) is the Weighted Moving Average of the last n periods
sqrt(n) is the square root of the number of periods in the WMA calculation
Traders often utilize the HMA in conjunction with other technical analysis indicators to validate trends and generate trading signals. The HMA can be implemented on any time frame, providing traders with flexibility in their analysis approach.
One of the key benefits of the HMA is its ability to identify changes in trend direction earlier than conventional moving averages. This is due to the HMA’s responsiveness to recent price movements, allowing it to quickly adjust to changes in market conditions.
However, like all technical analysis indicators, the HMA has its limitations and should not be solely relied upon. It is recommended that traders use multiple indicators and analysis techniques to confirm signals and make well-informed trading decisions.
To summarize, the Hull Moving Average is a potent technical analysis tool that can assist traders in identifying trends and generating trading signals. By incorporating a weighted moving average and a unique calculation approach, the HMA minimizes lag and enhances accuracy, making it a valuable component of any trader’s toolkit.
ChartAlert ships with the Hull Moving Average.
How to use the Hull Moving Average in trading?
To use the Hull Moving Average (HMA) in trading, consider the following tips:
Determine the trend
The HMA can indicate the trend direction. A rising slope indicates an uptrend, a falling slope indicates a downtrend, and a flat slope indicates consolidation.
Look for crossovers
Like other moving averages, the HMA can identify crossovers. A bullish trend may form when the price crosses above the HMA, and a bearish trend may form when the price crosses below the HMA.
Use multiple time frames
To understand the overall trend, use multiple time frames. A longer time frame helps identify the long-term trend, and a shorter time frame helps identify trading opportunities.
Combine with other indicators
Combine the HMA with other indicators, such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD), to confirm trading signals and make informed decisions.
Set stop-loss and take-profit levels
To manage risk and maximize profits, set stop-loss and take-profit levels. Place them above or below the HMA, depending on the trade direction.
Practice risk management
Proper risk management is essential. Risk only a small percentage of your account on each trade, and avoid risking more than you can afford to lose.
In summary, using the HMA as part of a comprehensive trading strategy is key to effective and practical use. Do not rely solely on the HMA but use it in conjunction with other indicators and analysis methods to confirm signals and make informed decisions.
Alan Hull on the Hull Moving Average
Alan Hull developed the Hull Moving Average (HMA) as a tool for traders to accurately identify trends and generate trading signals using a moving average that is more sensitive and precise. Its purpose was to address the time lag associated with traditional moving averages, which can often lead to false signals and missed price movements.
Hull believed that the HMA could be used in various trading strategies, such as trend following and mean reversion. For trend following strategies, traders would look to the HMA for a signal of a new trend in the market and enter trades in the same direction. In mean reversion strategies, traders would observe the HMA for signs of overbought or oversold conditions and enter trades when prices are expected to revert to the mean.
Moreover, Hull suggested using the HMA on multiple time frames to make informed trading decisions. By examining different time frames, traders can get a better understanding of the overall trend and find shorter-term trading opportunities. For example, traders could use the HMA on a daily chart to identify long-term trends and then employ a shorter time frame, such as an hourly chart, to spot shorter-term trades.
In summary, the Hull Moving Average was designed by Alan Hull as a versatile and trustworthy technical analysis tool that can help traders identify trends and generate trading signals in a variety of market conditions.
Advantages & Limitations of Hull Moving Average
Here are some advantages and limitations of using the Hull Moving Average (HMA) in trading:
- Reduced lag: Unlike traditional moving averages, the HMA is designed to be more responsive and can provide faster signals for entering and exiting trades.
- Smoother signals: The HMA uses weighted moving averages, which result in less choppy signals compared to other moving averages.
- Flexible period setting: The HMA allows traders to adjust the period setting to their preferred trading style and market conditions.
- Can be used in multiple time frames: The HMA can be effectively used in different time frames, providing a comprehensive view of the trend.
- False signals: Like any trading indicator, the HMA can produce false signals, especially in choppy or volatile markets.
- Sensitive to sudden price movements: The HMA can be sensitive to sudden price movements, which can result in whipsaws and false signals.
- Not suitable for all market conditions: The HMA is most effective in trending markets and may not be useful in choppy or range-bound markets.
- No guarantee of profitability: While the HMA can be a useful tool, it does not guarantee profitability, and traders must still exercise proper risk management and trading discipline.
Overall, the HMA is a valuable tool for traders, but it should be used in conjunction with other indicators and analysis methods to make informed trading decisions. Traders must also be aware of the HMA’s limitations and use proper risk management techniques.
The Hull Moving Average (HMA) is a technical indicator developed by Alan Hull with the goal of reducing lag and providing more accurate trading signals. By using weighted moving averages, the HMA produces smoother signals than traditional moving averages, and traders can adjust the period setting to fit their trading style and market conditions. The HMA can also be used in multiple time frames to get a better view of the overall trend.
However, like any trading indicator, the HMA has its limitations. It can produce false signals in choppy or volatile markets, and sudden price movements can result in whipsaws and false signals. The HMA is best used in trending markets and may not be effective in range-bound markets. Traders should use the indicator in conjunction with other technical indicators and analysis methods. Additionally, there is no guarantee of profitability, and traders must exercise proper risk management and trading discipline to avoid significant losses.