menu-caret
As seen on:
ntv-logo sky-logo comedy-central-logo

How does the Hull moving average work?

How does the Hull moving average work?
Asked by
Karl Wolf time-icon1 week ago
1 Answer Answer Question

Justin Freeman
Answered time-icon1 week ago

The Hull moving average was invented by Alan Hull in 2005 as an alternative to the standard moving averages and to eliminate the lag time associated with traditional moving averages. The Hull moving average (HMA) also minimises the noise associated with the simple moving average, making it quite adept at identifying trend direction and potential trade setups.

The main goal of developing the HMA was to eliminate the time lag found in traditional moving averages (MAs), and it does this extremely well while maintaining a very smooth curve.

These two characteristics mean that the HMA is popular among long-term traders, such as swing and position traders, who use it to trade with the trend and monitor price changes that could lead to trend reversals.

Chart 1: EUR/AUD daily chart with 20-day HMA and SMA indicators

How to calculate the Hull moving average

The Hull moving average is based on the weighted moving average (WMA). It is calculated in much the same way as the simple moving average (SMA), with the main difference being that the WMA uses a multiplier to add weight to the latest price moves and lessen the impact of older values.

However, once each individual value has been calculated using the multiplier, the WMA works similarly to the SMA, where the oldest values are replaced by the newest values.

The Hull moving average (HMA) calculation incorporates three weighted moving averages, as shown below:

  1. Calculate the weighted moving average (WMA) for a period n (16-periods)/ 2 and then multiply it by 2.
  2. Calculate the second WMA using n periods and subtract it from the WMA found in step 1.
  3. Find the third WMA using a period sqrt(n) and the WMA results from step 2 to get the Hull moving average.

The above steps can be summarized in the formula below

HMA = WMA (2*WMA (n/2) − WMA (n)), sqrt (n))

This is a complicated formula that most traders do not need to learn as it will not improve your trading in any major way. Most charting software incorporates the HMA indicator into its charts as standard.

However, the calculations may appeal to math lovers and programmers who might want to tinker with the formula and customise it to test out their trade ideas. This is not necessary for most traders.

 

How to use the HMA

Chart 2: EUR/AUD daily chart with potential HMA trade entries

As you can see from the above chart, the HMA is a much faster indicator than the SMA indicator, which is reflected in the trade entries pinpointed by both indicators.

The HMA indicator closely tracks the price because it uses multiple weighted SMAs. It can get you into both long and short trades based on the price crossing above and below the HMA much earlier than the SMA in all of the above cases.

The smoothed-out curve means that the HMA barely reacts to sudden price changes unless they persist for several periods, which could indicate that the overall price trend has shifted.

You could also use a moving average crossover of a faster HMA, like the 9-period HMA, and a slower one, like the 20-period SMA, to identify potential trade entries on the lower timeframes.

Using the HMA for trade entries on lower timeframes

Chart 3: EUR/AUD 15-minute chart with HMA trade entries

The above chart is a 15-minute live chart of the EUR/AUD currency pair, and you can see that there is not much difference between the trade signals generated on the lower timeframes and the higher ones.

However, the fact that the HMA tracks the price so closely has limited us to using the 20-period HMA on the lower timeframes to get clearer trade signals. This is also the reason we did not use an HMA crossover strategy; the chart would have become almost unreadable.

The bottom line

The HMA tracks price changes very closely and is an asset to trend traders who are keen to get in on potential trend changes at the earliest possible time.

However, this is also a major liability on the shorter timeframes, where the HMA is sometimes indistinguishable from the price due to its close proximity to the actual price.

The HMA is a powerful indicator on its own and should be considered by traders who use other types of moving averages, including the SMA and the EMA.

Login or Register to answer this question

question-icon 1 view-icon 35