Technical indicators help investors to understand market psychology besides demand and supply mechanisms. These indications together form a base for performing in-depth technical analysis. While metrics such as trading volume indicate a price trend’s continuation, indicators generate buying and selling signals. Technical traders and chartists use several indicators, patterns, and oscillators while trading multiple financial markets, including stock, forex, indices, and cryptocurrencies. DMI is also a popular technical indicator used to determine the direction and strength of a price trend. In this piece, we discuss DMI in detail.
What Is DMI Indicator?
Directional Movement Index (DMI) is a technical indicator that helps users determine the asset’s price direction. Founded in 1978 by J. Welles, the technical indicator compares previous lows and highs by drawing positive and negative directional movement lines. Traders sometimes also use the average directional line (ADX) as a third option along with these lines to measure the uptrend or downtrend’s strength.
When +DI exceeds -DI, the price is under more substantial upward pressure. On the other hand, If -DI exceeds +DI, the price is under additional downward pressure. Traders may use this indicator to gauge the trend. Traders might also use lines crossovers as buy/sell signals.
How to Calculate Directional Movement Index (DMI)
Directional Movement (DM) is the most considerable portion of the current period’s price range that sits outside the prior period’s price range. Calculate the DMI for each period.
Where
Positive DMI is equal to High – Previous High
Negative DMI is equal to Previous Low – Low
Reset the smaller of the two numbers to zero, i.e., if +DM is greater than -DM, then -DM = 0. On the inside bar ( a higher low and a lower high), both -DM and +DM have negative numbers; hence you can set them to zero, representing no directional movement for the specific period.
Calculate the True Range (TR) for each period, where:
TR = Maximum of (High – Low) x (High -PreviousClose ) x ( PreviousClose – Low )
Aggregate the -DM, +DM, and TR individually and smooth out using a proprietary smoothing approach developed by Wilder. For smoothing of n period, add 1/n of each period’s value to the total of each period, just like an exponential smoothing.
+DMt is equal to [+DMt-1 – (+DMt-1 / n)] + (+DMt)
-DMt is equal to [-DMt-1 – (-DMt-1 / n)] + (-DMt) (-DMt)
TRt is equal to [TRt-1 – (TRt-1 / n)] + (TRt) (TRt)
Then, calculate negative DI and positive DI as a True Range Percentage as shown below:
+DM/TR x 100
-DM/TR x 100
What Does the DMI Indicator Tell You?
Investors use Directional Movement Index (DMI) to analyze trend direction. Trading signals are crossovers. An uptrend may be underway when the positive DI crosses above the negative DI. On the other hand, a sell signal is generated when the positive DI crosses below the negative DI. When a downturn is underway, traders might initiate a short-term trade.
Traders may also use the indicator for trade or trend confirmation. In this case, the +DI is substantially above -DI, confirming existing long trades or fresh long-term trade indications concerning other entry approaches. If -DI is substantially above +DI, a severe downtrend or short-term positions are confirmed.
How To Read the Directional Movement Index (DMI)?
The DMI is positive when the current price – the previous high exceeds the current low – the previous high. So, if it’s positive, this index is the current high – the previous high.
The reverse is the negative DMI. In this case, the previous low – the current low is greater.
It’s helpful to know the DMI’s theoretical underpinnings. However, that’s not a compulsion anyway. You only need to understand how to employ the indicator when required.
You may notice that the DMI features three lines of varying colors. You may modify the colors to fit your trading style. The yellow-colored ADX line is the most crucial line in the chart above. It tells you what’s going on.
ADX value above 25 indicates a strong trend, whereas ADX having a value below 25 or below suggests there is no significant trend. Likewise, the Redline shows negative DM, while the blue line represents the positive DMI.
How to Use the DMI Indicator?
Traders can find the DMI indicator in toolkits of popular trading platforms, such as MetaTrader & PPRo8. After applying it to a price chart, traders may see three indicator lines: average directional index line, positive DI line, and negative DI line.
The indicator is most often used to gauge a trend’s strength. As a result, it can only be employed in a trending market.
The ADX number is the most typical interpretation. A value above 25 typically indicates a significant trend. Wilder suggested that an ADX of 20 or less indicates no substantial direction.
However, you can always customize these numbers. We know traders that utilized 30 to demonstrate a trend. The chart below is an excellent illustration.
Ensure the chart is going upwards or downwards before using the indicator. This is vital since it won’t work if the underlying asset price fluctuates.
Image Source: TradingView
Please note that the Directional Movement Index (DMI) may not always be correct. Traders should use it in conjunction with other trends, oscillators, and volume indicators. Use methods like candlestick pattern and Fibonacci retracement analysis.
How can Directional Movement Index (DMI) Help Traders Make Profits?
Let’s explore how to evaluate the DMI indicator in-depth and what information it may offer to help you generate higher earnings.
DMI – Trendlines
DMI incorporates the range’s expansion moving average for a specific period, i-e, 14 days. The indicator measure how strongly the price rises upward (+DMI) or downward (-DMI). The two lines show the power of the bulls and bears.
Each DMI has its own line (see Figure 1). Traders first need to identify which line is on the top. Day traders call it the dominating DMI, and it is more accurate and reliable. The lines must cross for sellers and buyers to swap dominance.
A crossing happens when the dominant DMI crosses the DMI on the bottom. While crossovers seem to be a clear indication to go long or short, many short-term traders prefer to wait for additional indicators to corroborate the signals. DMI line crossovers are generally inaccurate, giving misleading alerts during low volatility and late signals during high volatility. Crossovers are the earliest sign of a possible direction shift.
Given above image shows the positive DMI and negative DMI as independent lines. You may notice some false crossings on point one. The dominating positive DMI crossover at point 2 suggests an uptrend.
DMI – Directional Signals
The DMI indicator is used to confirm price action ( Figure 2). The +DMI often moves in lockstep with the price, rising and falling with the price. Notably, the -DMI goes in the opposite direction of price. The -DMI increases when the price decreases and lowers with the price increase. It takes a while to adjust. Remember that a price move’s strength is always captured when peaked in the DMI line.
It’s simple to read directions. The price goes up when the positive DMI rises. On the other hand, when the negative DMI rises, the price starts falling down. But pricing power must also be addressed. DMI strength spans from 0 to 100. The greater the DMI, the more volatile the prices. DMI readings above 25 indicate a strong price direction, while a reading below 25 indicates price weakness.
The above figure shows a choppy DMI at Point 1. With the +DMI over 25 at Point 2, the uptrend continues. At Point 3, +DMI moves in lockstep with price, while -DMI moves in opposition near Point 4.
DMI Momentum
The ability to view both selling & buying pressure simultaneously is a nice feature of DMI that allows traders to identify the dominant one before opening a position. The strength of bulls (swing highs) is mirrored in the positive DMI peak, while the negative DMI reflects the strength of bears (swing lows). The relative intensity of DMI peaks reveals price momentum and gives timely trading tips. When buyers outnumber sellers, the positive DMI rises above 25, and the negative DMI falls below 25. An upswing is visible here. When sellers outnumber buyers, the negative DMI peaks are above 25, while the positive DMI peaks are below 25. The tendency will be downward.
Price trending hinges on the dominating DMI being strong. A strong upswing will have increasing positive DMI peaks that stay above the -DMI (Figure 3). Strong downtrends are the opposite. In the absence of a dominating force, trend trades are inappropriate since both DMI lines below 25 start moving sideways. The finest trends start after lengthy durations of DMI lines crossing beneath 25. Price will break through support/resistance, and DMI will extend over 25.
In the figure, the positive DMI crosses over 25 at Point 1 and stays above the negative DMI. You may notice that negative DMI did not cross throughout the rise. The buyers ( positive DMI >25) outperform the sellers (negative DMI 25).
DMI Pivot
DMI lines pivot when the price observes directional change. DMI pivots must have a price correlation with structural pivots. The positive DMI will also have a pivot high when the price does. However, there’s an opposite case with negative DMI since its price pivots low when the negative DMI pivots high.
DMI and price pivots must correlate with interpreting price momentum. Many short-term traders monitor for price and indicator convergence or divergence. Finding fresh pivot highs and +DMI highs is one way to validate an asset’s uptrend. A new pivot low and a new high negative DMI confirm a downtrend. This is a signal to trade the trend or follow the trend breakout.
Divergence occurs when the price and DMI do not agree. For example, when the price rises but positive DMI remains intact. Divergence usually precedes a reversal or retracement and is a risk management indication.
Price and positive DMI both establish fresh highs in the figure above, signifying a long entry. In another case of divergence (Point 2), the price achieves a new high, but the positive DMI does not, resulting in a retracement of the trend at Point 3.
DMI & Volatility
The DMI lines show price volatility. A trend enters a time of consolidation, and then the consolidation undertakes a trend period. Volatility lessens as prices consolidate. Because the buying and selling pressures are about equal, buyers and sellers often agree on the asset’s worth. Once the price has narrowed, it will widen as buyers and sellers cannot agree on a price. When price breaks through the support into a downtrend or bypasses resistance into an uptrend, supply and demand are no longer balanced. Volatility rises as the price seeks a new value level.
When a contraction or expansion range appears, the slopes of the DMI lines shift in opposing ways (Figure 4). Many short-term traders search for occasions when DMI lines diverge, and volatility rises. The more lines divide, the more volatile. Contractions occur when lines move closer together, reducing volatility. Contractions precede retracements.
It’s a downturn’s part in the above figure. Point 2’s contraction causes a reversal that starts with Point 3’s expansion. Price consolidates after Point 4’s contraction.
Limitations of the DMI Indicator
The DMI is a component of the ADX. The DMI trend direction may be combined with the ADX strength measurements. An ADX reading over 20 indicates a significant trend. Whether or not ADX is used, the indicator is prone to false indications.
Notably, positive DI and negative readings and crossings are based on the previous pricing and do not guarantee future results. Unresponsive pricing to a crossing might result in a lost transaction.
A crisscrossed line produces several indications but no price trend. To prevent this, only trade in the greater trend direction by employing long-term price charts, or using ADX readings to identify strong trends.
Bottom Line
In line with trend analysis, the price of an asset rises when the pivot highs and lows are rising. The trend remains intact, and the bulls strengthen when price highs are followed by greater positive DMI higher highs. On the other hand, lower pivot highs and lows indicate a decline. When the negative DMI peaks rise, the bears are in charge, and selling pressure increases. When price and DMI agree, you may follow the trend and start managing risk while they differ.
The greatest trading choices are based on data, not emotion. Price and DMI will inform you whether to sell or hold your position. DMI may be used to measure price movement and identify low and higher volatility periods. Irrespective of a bearish or bullish market, DMI has a plethora of information that may help you benefit.
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Technical indicators help traders to analyze past market trends and forecast future developments. While some traders develop personal indicators, usually with a programmer’s help, others rely on existing ones. As a result, indicators like the moving average and stochastic oscillator, or bespoke indicators, are becoming more popular among traders. ATR is also a widely used indicator that helps analysts determine market volatility. This article discusses the ATR indicator in detail.
What Is the Average True Range (ATR)?
Founded by American technical analyst J. Welles Wilder in 1978, Average True Range (ATR) is a volatility indicator that displays how much an asset changes on average. The technical indicator may assist day traders in deciding whether to enter a trade and where to set stop-loss order. Analysts calculate it by dividing the price range of an underlying asset over a specific period.
How Does Average True Range (ATR) Indicator Work?
The ATR indicator swings up and down when an asset’s price changes. Each period generates a fresh ATR measurement. For instance, the ATR is calculated daily on a one-day (D1) price chart, while it shows the ATR value every minute on a one-minute (M1) time frame.
Formula For ATR Calculation
ATR measures volatility by accounting for price gaps. Typically, traders calculate ATR using 14 periods, such as Minute (M1), Hour (H1), Day (D1), Week (W1), or Month (MN). Each one can calculate ATR. We have the following formula to calculate ATR.
The TRi represents a particular true range in this formula, and “n” shows the relevant period.
How to calculate the Average True Range (ATR)
Finding a security’s actual range value is the initial step in determining ATR. A security’s price range is just its high minus low. Traders can produce more trading signals by employing shorter periods, whereas longer intervals provide fewer indications.
For instance, if you are a short-term trader and want to look at a stock’s volatility over five trading days, you might compute the five-day ATR. Then, for each price range, you determine the absolute maximum of each, such as current high-current low, current high- previous close, and current low-previous close. That’s how you calculate ATR for the most recent 05-days and then average the value to find the first value of 5-day ATR.
What does Average True Range (ATR) Indicator Tell You?
Wilder created the ATR to employ it in the commodity market, but it is equally helpful to trade equities and indexes.
The ATR is a valuable tool for market technicians to initiate and exit trades. Its primary purpose was to help traders calculate an asset’s daily volatility more precisely. However, traders mostly use it to assess volatility generated by gaps and restrict up or downswings.
Traders typically employ ATR to exit a trade regardless of the entry point. One of the popular strategies is called the chandelier exit strategy developed by Chuck LeBeau. The chandelier exit establishes a trailing stop below the stock’s highest high since you opened a position.
In simple terms, the distance between the highest high and the stop level is the multiple of ATR. For example, you can deduct three times the ATR from the trade’s highest point since you entered.
The ATR may also help traders decide how much to trade in a derivates market. The ATR technique to position size can account for both the trader’s risk tolerance and the market’s volatility.
Example of Using the Average True Range (ATR)
Assume the five-day ATR starts at 1.41 and ends at 1.09. You can estimate the sequential ATR by multiplying the former ATR value with the number of days minus one and then adding the current period’s actual range.
Now divide the total by the chosen period. For instance, [1.41*(5 – 1)+(1.09)]/5 is expected to be the second ATR value. You may then use the formula throughout the entire timeframe.
ATR can not predict the breakout direction, but you can add it to the closing price, which will help you enter a buy position if the price rises over that figure the next day, as shown below. Rare trading indications generally mark big breakthrough moments. According to this theory, a price closing the ATR above the previous close indicates a shift in volatility. Buying a stock means you expect it to rise.
Limitations of Average True Range (ATR) Indicator
The ATR indicator comes with two significant limitations.
Being a subjective measure, ATR remains open for interpretation. No ATR measurement can tell you if a trend is poised to reverse or continue in the same direction. Instead, you must compare ATR values to previous readings to gauge a trend’s intensity.
ATR gauges volatility, not price direction, and may produce confusing signals, especially when markets or trends pivot. For example, a quick rise in the ATR after a strong move against the market trend may cause some traders to believe the ATR supports the previous direction when this is not the case.
Conclusion
Unlike RSI or MACD, ATR isn’t a trend indicator. Instead, it’s a volatility indicator that shows the degree of interest or indifference in a move. Large ranges, or True Ranges, typically accompany strong movements. Uninspiring maneuvers might have limited spans. As a result, traders may utilize ATR to verify a market move or breakout. A rise in ATR would imply significant buying pressure and confirm a bullish reversal. A bearish support breach with an increase in ATR would ensure the support break. Like other indicators, ATR can also lead to false interpretation, and traders must not depend solely on it. Therefore, it’s usually best to use along with technical tools and indicators for additional confluence.
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Frequently Asked Questions (FAQs)
Which indicator works best with the ATR indicator?
The Average True Range measures volatility. However, It is typically neglected as a market indicator since it indicates price action strength. Bollinger Bands are well-known indicators that may work the best with ATR.
How is Average True Range (ATR) helpful for traders?
Being a volatility indicator, ATR offers you an idea of how much the market may change. Day traders can use ATR with different technical indicators and strategies to find optimal entry and exit positions.
Which number is more suitable for the Average True Range (ATR) indicator?
Although it isn’t the only technique, the conventional ATR indicator number is 14. You can also consider using a lower number to emphasize recent volatility. More significant numbers allow long-term investors to measure more.
Whether you trade forex or explore profitable opportunities in the stock market, it is challenging to make money only using fundamental data. Therefore, it is pertinent to employ tools that present price activity and market data to improve the odds of profitability. Day traders rely on multiple technical indicators to identify market trends. This piece discusses a few most commonly used momentum indicators in detail.
What Is Momentum Indicator?
The momentum indicator is a technical analysis technique that determines a stock’s price strength. Momentum quantifies how fast stock prices rise or decrease. Traders use momentum indicators in conjunction with other tools and trend indicators to make an informed trading decision.
A stock’s price’s Momentum measures its rise or decline. It is well-known that momentum indicators are pretty helpful in trending markets since markets rise more frequently than they decline. In other terms, bull markets outlast bear markets most of the time.
Average Directional Index (ADI), Relevant Strength Index(RSI) and Moving Average Convergence Divergence (MACD), Rate of Change (ROC), and Stochastic Oscillator are some common momentum indicators.
How to calculate Momentum Indicator?
A stock’s Momentum is the difference between the current and previous closing prices. Technical Analyst Markets John J. Murphy plots a 10-day momentum line against zero-line.
We can use the following formula for calculating the momentum indicator.
Momentum = Current price – Closing price “n” days ago
Momentum can have both positive and negative values. Most traders and analysts use 10-day movement to gauge a stock’s momentum. The zero-line represents the stock’s trendless or sideways movement. The momentum line disperses away from zero when the stock’s momentum grows.
If the stock’s current price is higher than ten days ago, the positive number will be over the zero line. If the current price is below the 10-day price, the negative momentum value will be below the zero-line.
Look at the chart below to see how the RSI momentum indicator predicts price fluctuations.
Understanding Divergence
Divergence often signals the end of a price trend and the beginning of a new one. The divergence occurs when the stock price movement and the indicator disagree. A bullish divergence occurs when price and momentum move in opposite directions, while a bearish divergence occurs when the price and the momentum indicator move upwards. Price retracements are more likely to incur during price divergence.
Divergence helps traders identify and respond to price fluctuations. It signals a shift in the market, and investors must respond. No certainty of reversal exists. So, traders can decide to hold, sell, or partially book profits as the market moves.
Trending Momentum Indicators
Traders can use several momentum indicators. However, below are a few most used momentum indicators.
Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence (MACD) involves two indicators. It creates an oscillator by subtracting the longer average from the shorter average, the MACD’s primary indicator. A moving average converges, overlaps, and moves away from another to represent momentum.
The MACD uses two moving averages, as stated previously. However, it is up to the trader or analyst to choose between the 12-day and 26-day EMAs. In this way, a MACD line can operate as a signal line to detect price movement turns.
The MACD’s histogram shows the MACD line’s relationship to the 9-day EMA, which is crucial. Positive histograms above the zero-midpoint but falling towards the midline signals a deteriorating trend. On the other hand, a negative histogram below the zero-midpoint line but climbing towards it suggests a diminishing downtrend.
Image Source: Investing.com
Relative Strength Index (RSI)
RSI is another popular momentum indicator that most traders prefer to use for technical analysis. The RSI is an oscillator that measures price fluctuations and their pace. The indicator oscillates between 0 and 100.
Traders and analysts can notice signals by looking for divergences, failed oscillator swings, and indicator crossings above the centerline.
While the RSI figures rising above 50 suggests a positive uptrend momentum, the RSI values of 70 or more frequently indicate overbought situations.
Similarly, RSI values below 50 signal a negative decline, while RSI values below 30 indicate possible oversold circumstances.
Image Source: Investing.com
Average Directional Index (ADI)
It might be unfair not to mention the usefulness of the Average Directional Index (ADI) either. Welles Wilder created the Directional Movement System (DMS), including the Negative Directional Indicator (-DI) and positive Directional Indicator (+DI).
To calculate the ADX, you need to take smooth averages of the +DI and -DI, which results by comparing the two recurring lows and their relative highs. The Directional Movement System’s index measures the strength of a trend independent of its direction. An ADX rating of 20 or higher confirms a trend. However, any value below 20 is directionless.
Image Source: Investing.com
Rate of Change (ROC)
Rate of Change (ROC) is another momentum indicator that gauges the percentage change between two prices. The ROC indicator is displayed against zero, moving upward for positive price changes and downward into negative territory when the price falls. The indicator detects centerline crossings, overbought/oversold conditions, and divergences.
Image Source: Investing.com
Stochastic Oscillator
Traders use this momentum indicator to compare a stock’s current closing price over time. It measures the market’s pace and momentum without regard to volume or price. Stochastics oscillates between 0 and 100 and help detect overbought and oversold zones. This indicator displays an overbought zone when it is over 80 and an oversold area when below 20.
Image Source: Investing.com
How to trade using Momentum Indicators?
Momentum indicators help spot trading indications. They also assist analysts in validating trades based on price movements, such as breakouts and pullbacks. Traders can utilize momentum indicators in the following ways:
Crossovers: When momentum indicators pass through the centerline or other lines, the activity is called crossovers. Cross overs generate trade signals. For instance, the MACD Line crosses the centerline (zero line). Types of crossovers:
Signal line crossings are a typical MACD signal. A bullish trend develops when the MACD crosses the signal line on the upside. A negative trend happens when the MACD goes down and passes below the signal line.
Center Line Crossovers: A bullish trend occurs when the MACD crosses above zero-line. This happens when the stock’s 12-day EMA crosses over the 26-day EMA. A negative trend occurs when the MACD indicator intersects the zero line and swings lower. However, a trend’s strength may define its life as it may last a few days up to a month.
Alternative strategy:
It is best to enter and exit a position using one or two indicators. To quarantine a trend or entry point, use RSI. For example, the RSI can differentiate entry points from the Trend. Not to mention, the RSI reading should be above 70 during uptrends and above 30 during downtrends.
Trade can also use MACD to exit. For example, MACD can track stock losses in trading trends. If the Trend rises, you can short a position as soon as the price falls below the line. Similarly, traders can use other indicators for intra-day trading besides employing momentum indicators.
Pros and Cons of Using Momentum Indicators
While momentum indicators are pretty helpful in technical analysis, they can also sometimes be a source of inconvenience. Below are some pros and cons of using momentum indicators.
Pros
Momentum indicators reveal an asset’s price trend. They also assess the price movements’ strengths and flaws.
Momentum indicators enable users to make informed trading decisions. In other terms, they assist you in determining market entry & exit points. Price divergences identify the signals.
Momentum indicators work pretty well for trend confirmation.
Cons
Momentum indicators can be misleading when used in isolation.
Newbies might find it challenging to understand and interpret them.
Bottom line
Momentum indicators are helpful to identify the best time to enter or exit a trade based on price momentum. Traders and analysts use momentum indicators in conjunction with other trend-following indicators as additional confirmation.
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Frequently Asked Questions (FAQs)
What is momentum trading?
Momentum trading is a method that aims to enter the Trend as it gains momentum. In simple terms, momentum is the tendency of a price trend to rise or fall for a period, generally considering both volume and the price.
Why is momentum necessary in trading?
Prices follow an upward or downward trend, and the momentum indicator shows the strength of a trend. It is also a leading indicator, as it generates buy & sell signals, helping traders open an appropriate position.
How does Trend differ from Momentum?
While the momentum takes account of a stock’s annual performance (i-e past twelve months), the Trend Following macro style element examines the contract’s performance over the last six and twelve months and takes an average.
Since trading indicators can decrease latency, remove noise, and respond quickly to market moves, many traders use different technical indicators for trading purposes. Plenty of specialized tools, technical indicators, and programming languages are available, helping traders generate increasingly sophisticated visual measures to overlay their charts. However, people seem to have been affected by excess. With an overwhelming amount of indicators and drawing tools on price charts, traders are most likely to become confused. Therefore, employing only a few most valuable technical indicators can help you keep your charts as clean as possible and stay focused. This guide will detail a multi-purpose technical indicator – the Hull Moving Average (HMA).
What Is Hull Moving Average (HMA)?
The Hull Moving Average (HMA)is a technical indicator used to determine a market trend. It records the current market position and compares it to past data to ascertain a bullish or bearish outlook. Unlike EMA or the SMA (SMA), the HMA provides a quicker indication on a flat visual plane, reducing the latency usually associated with MAs.
An indicator must balance producing an accurate signal with minimal latency and offering a fast-paced, high-volume first-mover benefit to gain a competitive edge. HMA has two dimensions, including positional and directional values. While positional value is a default attribute of all moving averages used for identifying the location according to the price, directional value emerges from the present directional slope.
For instance, the HMA is the blue one sloping upwards and another one colored in orange sloping downhill. The binary represents bullishness or bearishness in the following chart.
Note: TradingView’s Hull indicator lacks color change confirmation and has reduced visual display clarity. Therefore, use a custom script instead of TradingView’s Hull indicators.
Like SMA and EMA, the length of HMA can be increased. It could result in altering the indicator’s price history analysis. Choosing short Hull results in the following:
Watch the moving average hugging price because the length is 15 (standard value ranges between 45 to 90). Due to the aggressive slope computation, a low duration causes quick signal switching.
Customize the HMA to your target market and timeline. It is not always necessary for the HMA that works on the USD/CAD (4H) time chart to work on the BTC/USD (1W) chart. To have a decent hit rate, you need to analyze the charts and refine the indicator parameters.
History of Hull Moving Average
Alan Hull developed the HMA in 2005. Being an IT expert and Mathematician, he introduced the Hull Moving Average, claiming that it reduces lag while improving smoothing. Presently, swing & long-term traders use it to corroborate trading signals based on many in-depth study methodologies.
The HMA isn’t very distinctive. It is only a variant of other MAs (SMA, for example). However, it still works well for traders since it produces a flat line that is easy to understand.
Formula to Calculate the Hull Moving Average?
Hull Moving Average (HMA) is pretty simple to calculate. What matters is you know how to employ the Weighted Moving Average (WMA). Given below are a few steps to calculate Hull Moving Average.
Step1: Use “n/2” as a period to calculate the weighted average and multiply it with 2.
Step2: Find out the weighted moving average for the period “n”, and then subtract it from the number calculated in step1.
Step3: Use the data from the second step to calculate the weighted moving average for the square root of the period “n”.
We have the following equation for the HMA formula.
HMA = WMA(2 x WMA(n/2) − WMA(n)), √(n))
How to use the Hull Moving Average?
Based on the previous data, HMA is a directional trend indicator that uses recent price activity to evaluate if the market is bullish or bearish. HMA indicator has two dimensions, such as a position and a direction. Traders utilize the former to establish pricing locations. The latter is derived from the prevailing market slope. The HMA’s smoothness and responsiveness occur due to the combination of both.
This indicator’s appearance on a chart is similar to other moving average indicators. While illustrating bullish or bearish tendencies, the HMA may employ a variety of colors on different platforms.
Before moving on how trade using the HMA indicator, let’s first discuss the optimum periods for the HMA and how they affect its look and symptoms. When using the HMA for long-term trading, the lengthier time allows you to recognize patterns more accurately. Notably, shorter periods might be more advantageous than longer durations for day traders who wish to record price swings in real-time. Entry signals from a shorter time HMA usually follow the trend.
How To Trade Using Hull Moving Average?
Hull Moving Average indicator works best for directional signals rather than crossovers since they are prone to lag distortion. Instead, seek turning points to locate entrances and exits.
You can use the HMA in the following ways.
1) Buy an underlying asset when HMA starts turning up.
2) Sell an underlying asset when HMA starts turning down.
The HMA is easy to use. Its essential premise is that if the indicator rises, the trend is rising. So you can long hold your position. Alternatively, if the market becomes bearish and the signal follows suit, it may be time to sell.
Hull Moving Average (HMA) VS Other Moving Averages
Hull Moving Average (HMA) is interpreted similarly to other moving averages. But it’s meant to fix their fundamental issues, such as their inability to filter out market noise and latency avoidance. That’s why the HMA is faster than other moving averages and can assist in confirming a trend or suggesting a price shift at the proper time.
In other words, the HMA offers a quicker signal on a flat visual line. It outperforms different types of moving averages due to its low-latency trigger.
Not to mention, the HMA lets you customize the observation period like other moving averages. Also, it allows you to alter the indicator’s price history analysis.
Now let’s look at the critical distinctions between HMA and other moving averages, including Simple Moving Average (SMA), Exponential Moving Average (EMA) and Weighted Moving Average (WMA).
Simple Moving Average (SMA)
SMA stands for Simple Moving Average. It is the most straightforward moving average. Despite being a cornerstone of technical analysis, it has several flaws. That’s why there are multiple moving averages. Not to mention, all of them aim to improve the indicator’s signals, efficiency, or usability.
You can calculate a simple moving average (SMA) by averaging the price over time. It detects trend direction. If it’s increasing, it suggests a bullish trend. On the other hand, a declining indicator signals a bearish market ahead.
While long-term traders use an SMA proxy of 200-bars, a 50-bar SMA is used to comprehend intermediate-term trends.
SMA has the most significant price lag compared to other moving average indicators. Traders use longer intervals to mitigate this issue. However, latency between the source and SMA still prevails. The HMA is preferred because it outperforms the SMA.
Given below figure compares the blue-lined HMA and yellow-lined SMA. As evident, the SMA is smoother and tracks the price better.
Image Source: Finamark
Exponential Moving Average
The EMA is analogous to the SMA (SMA). Both assess trend direction over time, and their signals are interpreted similarly.
The Exponential Moving Average (EMA) was developed to address the SMA’s significant latency. While the SMA estimates average price data, the EMA gives more weight to recent data. Notably, favoring recent periods may work for specific traders but not for others.
The HMA utilizes the EMA’s principal benefit. It is quicker and more fluid than SMA. While the EMA reduces the SMA’s latency, the HMA makes it inconsequential. It also enhances line smoothing.
You can compare the blue-lined HMA and the green-lined EMA in the image below. In contrast to the SMA, which is more sensitive to market movements, the EMA is less responsive.
Image Source: Finamark
Weighted Moving Average
It is a weighted variant of the EMA. It emphasizes new data over older data. To do so, the WMA multiplies each bar’s price by its weighting factor (see below). So it’s more versatile than the EMA or SMA. But, once again, the HMA’s reactivity outshines them.
Below is a chart that compares the two indicators. The HMA (blue line) closely tracks the price more than the purple-lined WMA.
Image Source: Finamark
The WMA, like other moving averages, determines trend direction. Traders utilize it for buy and sell signals (for instance, going long when the price dips close or below the WMA and going short when the price tops above it).
Overall, the WMA is more responsive to price movements than the SMA and EMA but less sensitive than the HMA.
Pros and Cons of Using Hull Moving Average (HMA)
Using the Hull Moving Average indicator has several advantages and disadvantages listed below.
Pros
HMA is a simple indicator that is easy to understand and adapt.
Unlike other MAs, it minimizes latency.
Traders can use it while trading different financial markets, such as commodities, stocks, ETFs and equities.
Most trading platforms like MT4 and TradingView offer it by default.
Cons
Some users claim that lowering the latency renders it ineffective.
Calculating HMA might appear a little complicated to some users.
It is accused of not providing a clear indication for entry or exit.
Conclusion
HMA is a valuable day trading indicator. Traders usually prefer to use it with different indicators like the RSI (Relative Strength Indicator or ATR (Average True Range).
While the HMA is one of the most thorough, sensitive, lag and noise-resistant moving averages, it is not the silver bullet. Its responsiveness may act as a two-edged sword. It can spot trends faster than other moving averages, but it also whipsaws more frequently than other moving averages.
To summarise, the HMA is an excellent indicator to add to your technical trading toolbox, provided you know how to utilize it and practice it in a trading simulator.
Furthermore, trading knowledge isn’t always the primary limitation for most traders. Instead, the lack of capital restricts them from exploring more potential. The financial stress negatively impacts their trading performance and the urge to make quick returns over a short time leads them to incur losses. If you are also finding it difficult to continue your trading journey due to funds limitations, you may check out Traders Central’s funding options and pick one that suits you best. It will relieve the strain of expecting unrealistic earnings in a short interval and allow you to focus solely on your trading expertise.
Frequently Asked Questions (FAQs)
Is Hull moving average a good analysis tool?
Yes, Hull Moving Average is a good analysis tool. Although, the SMA (Simple Moving Average) is the most simple form of moving average. It fails to compete with the Hull Moving Average (HMA), a rapid and smooth moving average invented by Alan Hull. The HMA nearly removes latency entirely and simultaneously improves smoothness.
What is Hull moving average formula?
The Hull Moving Average improves the responsiveness of a moving average while preserving the smoothness of the curve. You can use the following formula to calculate HMA:
Using a sample account to experiment with different time frames is the best way to find the one that works best for you. When trading, we recommend using the following timeframes: 15, 25, and 50.
How do I read Hull moving average?
Shorter HMAs are frequently employed to locate entry points. When the overall market trend is up, HMA suggests you buy long. Inversely, a downward trending HMA is a hint to buy short.
Is Hull Moving Average better than Exponential Moving Average?
Hull is different from typical trend indicators, such as the EMA and SMA. It reduces latency by producing quick signals on a smooth visual plane.
Traders employ different technical indicators to assess supply and demand mechanisms and understand the market psychology. Since indicators can generate reliable trading signals, they help investors to find profitable trading opportunities. However, technical indicators don’t guarantee market success. Therefore, traders must also learn effective risk management strategies. In this piece, we discuss the OBV indicator in detail.
What Is OBV Indicator?
On balance volume (OBV) is a technical indicator used to link price and volume while trading stocks. The indicator measures selling and buying pressure utilizing volume and help clients to predict the price movements of the underlying security. No doubt that volume has a vital influence on the stock market, and it represents the attention of market players and aids in price speculation. That’s why people prefer using the OBV indicator.
History of OBV Indicator
Understanding the need for comprehensive volume structure research that gives more trading buffer, especially in turbulent markets, Joshep Granville invented the OBV in 1963. He believed volume has a more substantial influence on markets than price change.
Granville further explained that if volume grew or fell drastically without affecting the price of the issue, the cost would eventually go higher or lower.
What Does OBV Indicator Tell You?
The OBV hypothesis distinguishes between savvy institutional investors and less skilled retail traders. The volume appears to increase as institutions, including investment funds and trading houses, start buying the stake of ordinary investors available for sale. Over time, volume tends to drive the prices upward. On the other hand, the reverse occurs as institutions sell their positions and ordinary investors re-accumulate.
Despite being drawn on the price chart and quantified statistically, OBV is irrelevant. Although the indication is cumulative, the time interval remains fixed. Therefore the actual numerical value of OBV is dependent on the start date. So instead, traders and analysts focus on the OBV line’s slope over time.
Analysts typically track institutional investors using the OBV Indicator. To illustrate purchasing opportunities against prevalent trends, they use volume and price divergences as a metaphor for connecting smart money and the diverse masses. For example, institutional investors may bid up an asset’s price before selling it.
Formula to calculate OBV
OBV calculation becomes pretty simple after understanding the relation between two recurring trading days’ closing prices.
Please note that today’s price may be lower, greater, or the same as yesterday’s volume depending on the price connection. We have the following three equations for the OBV in all three cases:
1)OBV = Yesterday’s OBV – Today’s volume
2) OBV = Yesterday’s OBV + Today’s volume
3) OBV = Yesterday’s OBV = Today’s volume
Example of OBV Indicator
Consider a hypothetical daily share price and volume. Let’s understand it using the following numbers. We’ll convert them to OBV changes.
First Day = $10.00 per share; 10,000 shares
Second Day = $10.10; volume = 12,000
Third Day = $10.05; volume = 14,000
Fourth Day = $10.15; volume = 8,000
Fifth Day = $10.12; volume = 9,000
Since the first and the second day are days with price spikes, we add these traded volumes to the OBV. On the other hand, the prices fell down on the third and fifth days, so the volume is subtracted from the cumulative OBV figure. The OBV on the fifth day may look like this;
First Day’s OBV equals to 0.
Second’s Day OBV = 12,000 (0 + 12,000)
Third’s Day OBV = -2,000 (12,000 – 14,000)
Fourth’s Day OBV = 6,000 (-2,000 + 8,000)
Fifth’s Day OBV = -3,000 (6,000 – 9,000)
This calculation shows that OBV can be negative or positive. The premise is that as the share price rises, OBV rises proportionally. OBV falls by the share volume each day when the share price falls.
Difference between OBV and Distribution/Accumulation line
Being momentum indicators, both OBV and the accumulation line rely on volume to forecast the smart money movement. However, the similarities cease there. It is computed by adding up the volume on each up day and subtracting it on the down days.
Not to mention, the accumulation/distribution line is calculated differently from the OBV. The Acc/Dist is calculated by taking the current price’s position relative to its previous trading range and multiplying it by the volume of that time.
How to set up an OBV Chart?
The OBV is a volume-momentum indicator that requires no changes. The OBV automatically modifies its values depending on automated calculations.
You may adjust the indication line’s color or thickness to improve the user experience. For instance, if the default color of the line is green and you like simple candlestick charts, you can modify the line’s color.
You may also move the OBV’s box on your chart to better organize your workspace for trading.
When putting up the OBV on your chart, avoid using time frames less than 4 hrs because they have significant volatility and might create extra noise.
How to trade using the OBV indicator?
Clients can use the On Balance Volume (OBV) indicator in three ways.
Method 1: To validate a trend continuance, traders can employ the OBV indicator.
Method 2: When the OBV and price trend are in opposition, clients can use the OBV indicator anticipating a price reversal.
Method 3: The OBV indicator can indicate the early breakout, precisely if the price moves in a range.
On Balance Volume (OBV) Confirmation
OBV confirmation enables you to discover a price trend. For example, when changes in volume and price are positively correlated, it can signal a high probability confirmation of a trend. In this circumstance, the rise in volume would lead the price to surge, while a volume decrease may result in price decline.
Confirmation of OBV on Stock Charts
The OBV indicator confirms that a rising trend will continue in the price of an asset class like stock. In this case, the OBV indicator validates the uptrend by increasing.
Confirmation of OBV in Crypto charts
In this case, OBV corroborated the bitcoin price trend. As evident, the bitcoin price reached a new ATH (all-time high) due to incremental volume flow.
Divergence of On Balance Volume (OBV) Indicator
The divergence occurs in an uptrend when the price prints a higher high (H-H) but OBV prints a lower high (LH). On the other hand, a downtrend involves price printing a lower-low (LL) and OBV printing a higher-low (HL).
Divergence of OBV indicator in Stock Charts
When looking at the share price of Apple, it appears that the price has made a new high, and the trend is upward. On the other hand, the OBV indicator shows a lower high, which implies bulls have lost power and selling pressure has started building up.
Divergence of OBV indicator in Crypto Charts
When a price approaches its support/resistance levels, it responds violently. In such a scenario, bitcoin’s price rose, OBV volume decreased. In actuality, OBV revealed bitcoin’s price reversal before it dropped. In other words, when the price rose, bulls lost power, and bears seized control.
OBV breakout
Breakout trading is no longer as simple, and many traders fall into bull/bear traps. OBV can assist traders in differentiating a messy breakthrough from a real one. Just remember, If the price breaks a resistance level, the volume should increase.
On the other hand, If the price breaks a support level, it should lose volume.
Breakout of OBV indicator in Stock Charts
In this case, Tesla shares range on a certain price level with firm support. Observing the volume movement in this area, the OBV verified the price breakout to the downside before the price plummeted. It can also predict a price breakthrough before it occurs. In this situation, bears control the cost and escalate selling pressure, causing it to crash.
Breakout of OBV Indicator in Crypto Charts
Not to mention, the price swings of cryptocurrencies are unique. The bitcoin price fluctuates too much, causing traders to lose focus.
OBV suggested a price break out just ahead of the price surged in this case. In other words, holding a position for an extended period at this price level would be beneficial with a close stop loss.
Limitations of OBV Indicator
Like all other indicators, OBV can lead you to false interpretation. Therefore, you should have realistic expectations while using it. Do not forget to take precautions before employing it.
In extremely liquid markets like Forex (e.g. EUR/USD), the OBV might be useless in determining whether a signal is correct or incorrect. Essentially, there are numerous buyers and sellers for each price when there is enough market liquidity. So, more volume doesn’t always mean more money. OBV indicator is more useful in other markets such as stock or crypto.
Market volatility can also significantly impact the performance of the OBV indicator. It might mislead you after price breakouts. Since the OBV indicator cumulates volume, even a single candlestick volume may significantly impact.
In such a scenario, it becomes difficult to ascertain If buyers/sellers can manage price after hitting new levels or they’ve lost control. In other words, you may use the OBV indicator to validate price movement before a breakout. However, making a move based on the OBV indicator after the breakout wouldn’t be wise. Instead, it would help if you use other technical indicators combined with the OBV to confirm the price action.
Notably, low volatility always makes lower periods noisier. But again, OBV can produce false indications in smaller time frames. So avoid using OBV as a sole indicator while trading lower time scales.
Pros and Cons of OBV Indicator
Like other indicators, the OBV indicator also comes with some pros and cons listed below.
Pros
OBV is one of the leading indicators that reasonably predict significant market changes
Clients can learn the computation, plotting, and interpreting signals in a few trading sessions. Of course, you’ll need to practice identifying institutional from retail volume. Not to mention, some indications and order flow can be fraudulent. Overall, the OBV is one of the most user-friendly indicators.
The OBV indicator works in all types of markets, including stocks, bonds, futures, forex, and cryptocurrencies. However, the market must have related exchange volume and evaluate more extended time-frames.
Among all volume indicators, traders use the OBV the most. The indicator is generally found to be preferred among day traders due to being a real-time momentum indicator. Experts who wish to add insights based on volumes to their analyses also find it pretty useful.
Cons
Dealing desk brokers can increase volume by issuing bogus orders and canceling them before their execution. A surge in trade volume might throw off the indicator. Due to a fake trend, it may fool you into hurrying your trading choice.
It generates signals but doesn’t tell much details. The trader can’t study the reasons that led to a specific indication. Irrespective of bucks or pennies, the OBV indicator adds or subtracts/eliminates the same volume independent of price. As a result, we deem the indicator unconvincing for price analysis. So each produced signal requires a trader to incur risk.
While this is true for most indicators, it is especially true for the OBV. Because volume analysis is not definitive, traders typically use additional indicators to seek breakouts, such as adding Moving Average lines (MA) to the OBV.
Conclusion
In the present times, with the increase in accessibility of trading tools to almost everyone with a device and internet connection, more and more participants are involving in the market. Therefore, both the volatility and volume keep increasing day by day. Although the OBV works in small and large volume markets, the indicator might not cater to turbulent market conditions. Price surges or downfalls, flash crashes, and transaction cancellations destabilize prices and impact the trading volume. It can push the OBV beyond boundaries and promote false signal production. The OBV indicator might be helpful when combined with other indications. So, it can assist you in spotting trend reversals, divergences, or confirmations, enhancing your trading techniques. However, in today’s economy, it isn’t worth utilizing alone. Undoubtedly, employing OBV as your only signal could end up as a catastrophe. If you really find an edge with this indicator alone, well done. If not, it’s generally best to use it as a confirmation and create your own strategy, backtest and then live test to validate the statistics you have collected in your backtesting.
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Frequently Asked Questions (FAQs)
What does a negative OBV suggest?
A negative OBV suggests two things; the price is low today than yesterday, and the traded volume is more significant today than yesterday. It generally indicates tremendous selling pressure followed by a probable bearish pattern.
How accurately does the OBV Indicator work?
The OBV indicator works accurately in a steady market, specifically when you apply OBV to larger time frames, and there is low market volatility. However, it is better to avoid depending solely on its indications. The OBV works best when combined with other indicators.
Irrespective of the financial market you trade, it is crucial to make lucrative trading decisions. Likewise, the use of trading indicators for an intraday trader is simply unavoidable. However, it is well said that success requires more than a decent trading platform. While indicators aid in reading a trading chart and determining market ranges or trends, they help clients detect overbought, oversold, and reversal situations. In this piece, we discuss the Supertrend indicator in detail.
What Is Supertrend Indicator?
Founded by Olivier Seban, the Supertrend indicator produces precise buying or selling signals in a trending market. Plotted on price shows the current trend employing only two parameters: period and multiplier. Traders often consider it the same as other trend-following indicators, such as moving averages and MACD. However, it works much better across all time frames, including 1-Min, 5-Min, or 15 Min charts.
The Supertrend indicator strategy’s default parameters are 10 for ATR and 3 for its multiplier. In addition, the Average True Range (ATR) helps calculate the indicator’s value and signifies the extent of price volatility.
Changes to these data may impact the usage of the Supertrend indicator. Please note that no trading indicator has an optimal setting. Changing too many settings might result in a trading system that is over-optimized for the moment. Therefore, the less you change the settings for the indicator, the more productivity you can expect from it. Although more settings may reduce market noise, they can also reduce the reliability of the trading signals.
How does the Supertrend indicator work?
Like a Moving Average (MA), the Supertrend indicator is a trend-tracking overlay on a trading chart. Not to mention, it performs well in trending markets but can be misleading in range markets. Since the indicator employs the ATR to calculate volatility in the market, a trader should develop a strong understanding of the ATR first.
ATR is another indicator that measures market volatility by decompressing a security’s price range across time.
A true-range indication is the highest of these values: (current high – current low), (current high – previous close), and (current low – previous close).
To obtain the ATR, find the TR values for the series first, and divide them by the number of periods represented by n. Hence you get the actual range moving average.
So, we get the following equation by putting the abovementioned data into the ATR calculation.
This formula helps comprehend the indicator’s working procedure. First, ensure the super-trend indicator is configured correctly. Set Periods (ATR days) and adjust the multiplier accordingly. A multiplier is a number that increases ATR. Traders often employ ten for periods and a three for the multiplier. Prices adjustments are more responsive to shorter n values. Notably, there will be fewer signals to act upon if n is larger.
How to Setup the Supertrend indicator?
After installing it on your trading platform, you need to follow the simple steps listed below to set up the indicator.
Step 1: To trade a stock, open its chart.
Step 2: Set an intraday trading period of 10 minutes. Any standard charting software would work fine.
Step 3: Make your indication the super trend. You can set the figures to either 10 & 3 or use your custom configuration.
Step 4: Now start tracking favourable indications.
Step 5: You may also use the arrows to purchase and sell stocks.
How to trade using the Supertrend indicator?
The Supertrend indicator helps you perform solid technical analysis on any stock. You can also have confirmation of trend and decide whether to go long or short using this indicator. Since it works best in a trending market, determining an up or downtrend in any market shouldn’t be difficult.
However, do not forget to employ the stop-loss feature while opening a position based on the Supertrend indicator. Using the indicator line for a stop-loss would be even better. Moreover, you can trail it irrespective of the price direction. If you want to go long, place your stop loss at the green signal line. In another scenario, put it on the red line.
The indicator’s primary purpose is to produce traders’ buy and sell signals. It exhibits changing patterns via flipping. When the stock price exceeds the indicator value, the indicator turns green and signals a buy. Similarly, a sell signal is received when the price falls below the indicated value, leading the colour to turn red. The indicator catches intraday patterns fast. While using it, keep the default settings of 10 and 3. Trying to lower the settings may result in false indications.
Undoubtedly, using the Supertrend indicator combined with your stop loss pattern is the most fantastic strategy to make money effectively.
Things To Consider While Trading With Supertrend Indicator
You may utilize this indicator on different time frames for entry and exit signals. i.e. starting with a larger timeframe and working your way down to lower time frames. Swing and position traders might employ more extended periods. However, the 15-minute should be the smallest period for using the Super trend indicator.
Pros and Cons of Supertrend Indicator
Like all other indicators, the Supertrend indicator also has some pros and cons of using it. Let us quickly enlist a few of them below.
Pros
The Supertrend indicator is well-known for producing accurate signals with default settings. Hence it appears to be one of the most reliable indicators.
It produces precise signals, enabling traders to make appropriate trading decisions fast.
The indicator is quick to set up, easy to understand, and simple to use.
Supertrend indicator is widely available across multiple platforms. Mostly, traders can download it for free.
It helps clients to perform quick technical analyses to find profitable trading opportunities.
Cons
The Supertrend works well in a trending market but can be ineffective in a range market. That means it doesn’t necessarily work every time.
The indicator employs only two parameters, including multiplier and ATR, which might not be sufficient in different trading conditions for predicting the market direction reliably.
Conclusion
The super-trend indicator works best in markets with unambiguous price patterns. In sideways markets, it may cause misleading signals, inciting erroneous trades. It is used with other indicators like moving averages and MACD for more efficient signals. Aside from the Supertrend indicator, no technical analysis tool works perfectly. Nevertheless, you may make wise selections and benefit handsomely. False signals occur from time to time using the Supertrend but are less often than produced by other indicators. Hence, using it in combination with other indicators is recommended.
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