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:
HMA[i] = MA[(2*MA(input, period/2) – MA(input, period)], SQRT(period)]
Where MA = Moving Average
SQRT = Square Root
What is the best period for Hull moving average?
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.