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Hull Moving Average

The Hull Moving Average Explained – How to Use it in Trading

The best trading indicators out there share some key similarities, including the ability to reduce lag, eliminate noise, responsiveness to market changes, and more. The Hull Moving Average (HMA) is a favorite of many traders. It’s a comprehensive moving average indicator that helps with all these essential tasks. It is also simple to draw and straightforward to interpret. This guide focuses on the specifics of the HMA. We’ll look at how to calculate it and the best way to apply it when trading. Let’s see how the Hull Moving Average can help you become a better trader.

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What is the Hull Moving Average?

The Hull Moving Average (HMA) is a directional trend indicator. Its goal is to provide more information of higher quality to those whose trading strategy depends on the slim margins within the price movements of an instrument.

The Hull Moving Average indicator is a combination of weighted moving averages (WMAs). It prioritizes recent price changes over older ones. The result is a moving average that’s dynamic yet smooth, able to help identify the dominating market trend. Some traders also use the indicator to time their entry and exit signals.

Alan Hull, a trader, mathematician, and IT expert developed the HMA in 2005. Back in the day, he introduced the technical trading tool with the following claim:

“It almost eliminates lag altogether and manages to improve smoothing at the same time.”

Today, swing and long-term traders apply it to complement other indicators or confirm trading signals combining various in-depth analysis techniques.

In reality, there is nothing especially unique about the HMA. It is just a variation of other moving averages (SMA, for example). However, it is still a robust tool for traders because it generates a smooth line that makes it easy to work with.

How do you calculate it?

Calculating the indicator is straightforward. We’ll need to know how to use the Weighted Moving Average (WMA). Calculate the Hull Moving Average by following the steps below:

  1. First, calculate a Weighted Moving Average with period “n/2” and multiply it by 2
  2. Next, calculate a Weighted Moving Average for period “n” and subtract it from the one calculated during Step 1
  3. Finally, calculate a Weighted Moving Average with a period the square root of “n” using the data from Step 2

The formula for the HMA looks like this:

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

How Can You Use the Hull Moving Average?

As a directional trend indicator, the HMA captures the current market’s dynamics. It determines whether the market conditions are bullish or bearish relative to historical data by relying on recent price action.

Knowing this should make interpreting the indicator fairly easy. Most trading platforms display the HMA with two dimensions. You have a positional value and a directional value. We use the former to determine the location relative to price. Meanwhile, we derive the latter from the direction of the current market slope. The combination of both is what allows the HMA to be so smooth and responsive.

Here is how the HMA looks on a 15-minute chart of the E-Mini S&P 500.

Source: Finamark

As you can see, there is nothing significantly different from the way other moving average indicators appear on a chart. You might see the HMA use various different colors on some platforms when depicting bullish or bearish trends.

Before we switch to the trading strategies you can apply with the HMA, we should take a minute to focus on the best timeframes for the HMA and their effect on the indicator’s appearance and signals. If you choose a longer period, you can use the HMA to identify trends more effectively, making it a better choice for long-term trading. On the other hand, shorter periods can be more beneficial to day traders who want to capture price movements as they unfold in real-time. Usually, when using a shorter period HMA, the entry signals are primarily in the prevailing trend direction.

Hull Moving Average Trading Strategies

According to Hull, the indicator’s signals are most efficient when using them for directional signals and not for crossovers (i.e., when a shorter-term MA crosses a longer-term MA). The reason is that crossovers are likely to be distorted by lag. Instead, he recommends looking at turning points to identify entries and exits.

Based on this, the strategies you can use with the Hull Moving Average are as simple as they get:

  • Buy when the HMA turns up
  • Sell when the HMA turns down

The HMA is quite simple to use. Its fundamentals are rooted in a basic concept – if the indicator rises, the prevailing trend is also going up. Thus, you can go long. On the other hand, once the market embraces a bearish trend and the indicator also starts to go down, that might be a good opportunity for going short.

Source: Finamark

Hull Moving Average vs. Other Moving Averages

The Hull Moving Average is very similar to other moving averages in how we interpret them. However, it is designed to improve their main flaw. Namely, their inability to isolate market noise and avoid lag. That is why the main difference between the HMA and the other moving averages is that it responds to price changes quicker and can help confirm a trend or signal a price change at the right time.

In other words, the universal benefit of the HMA is that it provides a faster signal on a smoother visual line. It is far superior to all other moving averages because it is a very efficient low-latency trigger.

Like with other moving averages, the HMA also allows you to tailor the duration of the observed period. You can change how far back the indicator looks into price history when analyzing market conditions.

Now, let’s dive into the core differences between the HMA and its cousins, the Simple Moving Average (SMA), the Exponential Moving Average (EMA), and the Weighted Moving Average (WMA) to see what makes them different:

Simple Moving Average

The Simple Moving Average (SMA) is the most basic type of moving average. Despite being one of the pillars of technical analysis, due to its simplicity, it has many drawbacks. This drawback illustrates why there are so many different moving averages. All of them try to fix a particular issue with the indicator’s signals, effectiveness, or case of use.

The SMA is the easiest moving average to construct as all it considers is the average price over a specific period. The indicator is often used to determine trend direction. If it is moving up, the trend is doing the same. If the indicator is going down, so is the movement.

Traders often use a 200-bar SMA as a proxy for the long-term trend. On the other hand, to grasp the intermediate-term dynamics, they usually rely on a 50-bar SMA.

Of all moving average indicators, the SMA suffers the most from price lag. While traders try to negate this issue by using more extended periods, it comes at the expense of introducing more lag between the SMA and the source.

The HMA is far superior, considering that it gives traders a first-mover advantage, which the SMA cannot.

The chart below shows the difference between the HMA (blue line) and the SMA (yellow line). As we can see, the former is much smoother and follows the price much closely.

Source: Finamark

Exponential Moving Average

The Exponential Moving Average (EMA) is similar to the Simple Moving Average (SMA). Both measure trend direction over a certain period, and the way we interpret their signals is also fairly similar.

The Exponential Moving Average (EMA) was designed to fix the problem with the excessive lag the SMA suffers from. The difference between both indicators is that, while the SMA calculates an average of price data, the EMA applies more weight to more recent data. While prioritizing recent periods is a viable strategy, it still doesn’t perfectly match the needs of more time-sensitive traders.

The HMA makes use of the EMA’s main advantage. It is much faster and smoother than the SMA. While the EMA eliminates a portion of the SMA’s lag, the HMA eliminates almost all of it to a point where its effect is negligible. Besides, it also improves the line smoothing process.

The example below shows a comparison between the HMA (blue line) and the EMA (green line). While the EMA is much closer to the price than the SMA, it is much less responsive to the market dynamics than the HMA.

Source: Finamark

Weighted Moving Average

The third moving average in the series, the Weighted Moving Average (WMA), is an enhanced version of the EMA. It puts even more weight on the recent price information and less on older data. To do that, the calculation of the WMA multiplies the price of each bar by the weighting factor. Consequently, the indicator is much more flexible than both the EMA and the SMA. However, it is, once again, no match for the HMA and its responsiveness.

The example below shows the difference between both indicators when plotted on the same chart. The HMA (blue line) tracks the price much more closely than the WMA (purple line).

Source: Finamark

Similar to all other moving averages, the WMA is used to determine the trend direction. Traders use it to identify buy and sell signals (buying when the price dips near or below the WMA and selling when it tops near or above it).

In a nutshell, while the WMA is much more sensitive to price changes than the SMA and EMA, it is still less responsive than the HMA.

Final Thoughts

The Hull Moving Average (HMA) is a fairly comprehensive indicator for day trading. While many consider it powerful enough to work as a standalone indicator, it is always better to complement its predictive ability with other indicators like the Relative Strength Index (RSI) or Average True Range (ATR).

When it comes specifically to moving averages, while the HMA might be the most complete, responsive, lag- and noise-resistant among all, it isn’t necessarily the silver bullet. Furthermore, the fact that it is more responsive might be a double-edged sword. On one side, it can identify trends sooner, but, on the other, it can also experience whipsaws more often than the other moving averages.

To wrap up, the HMA is a great indicator to complement your technical trading arsenal if you know how to use it and take the time needed to master its application in a trading simulator.