Hull Moving Average: Definition, Calculation, and Drawbacks

What Is Hull Moving Average?

The Hull Moving Average (HMA) is a type of moving average designed to improve the accuracy and responsiveness of traditional moving averages.

It is developed by Australian trader Alan Hull and it aims to reduce the lag often associated with moving averages while maintaining a smooth curve.

The HMA indicator achieves its goals using a unique calculation involving weighted moving averages (WMAs) and a smoothing technique.

This weighting reduces the delay in reflecting price changes, allowing traders to react more quickly to market movements.
 

Key Features of the Hull Moving Average

• Reduced Lag: One of the primary benefits of the Hull Moving Average is its reduced lag. Traditional moving averages, like the SMA and EMA, tend to lag behind current prices, making it harder for traders to respond to market changes.

• Smoothness: Despite being more responsive, the HMA maintains a smooth curve, avoiding the choppiness that can make other fast-moving averages difficult to interpret.

• Adaptability: The HMA is highly adaptable to different trading styles and timeframes.
   

Differences Between HMA and Other Types of Moving Averages

The Hull MA stands out among other types of moving averages due to its unique calculation method, which combines elements of weighted moving averages and smoothing techniques.

Here's how the HMA compares to the Simple Moving Average (SMA) and the Exponential Moving Average (EMA):
 

HMA vs. SMA

The Simple Moving Average (SMA) is one of the most straightforward moving averages, calculated by taking the average of closing prices over a specified period.

For example, a 10-day SMA adds up the closing prices of the last 10 days and divides by 10.

While easy to calculate and understand, the SMA has a significant lag, making it slow to respond to recent price changes.

In contrast, the Hull Moving Average (HMA) uses a weighted approach to reduce this lag. By giving more weight to recent prices and applying a smoothing technique, the HMA responds more quickly to price changes while maintaining a smooth curve.

This allows traders to identify trends and potential reversal points earlier than they might with an SMA.

This highlights the difference between HMA and SMA in speed and accuracy.

HMA vs. EMA

The Exponential Moving Average (EMA) addresses the lag issue found in SMAs by giving more weight to recent prices.

This makes the EMA more responsive to new information. However, while the EMA reduces lag compared to the SMA, it can still be susceptible to market noise, resulting in false signals during volatile periods.

The Hull Moving Average (HMA) takes the concept of weighting prices further by incorporating weighted moving averages and a unique calculation that enhances responsiveness and smoothness.

This balance between responsiveness and smoothness makes the HMA more reliable in identifying genuine market trends than the EMA, which can sometimes react too sensitively to price spikes or drops.

How to Calculate the Hull Moving Average

The Hull Moving Average formula can be expressed as:

Calculating the Hull Moving Average (HMA) involves a series of steps designed to reduce lag and enhance the smoothness of the resulting line.

Here’s a detailed breakdown of the Hull Moving Average calculation process:

Calculate the Weighted Moving Average (WMA) with a Period of n/2

• The first step involves calculating a Weighted Moving Average (WMA) using half the period (n/2). The WMA gives more weight to recent prices, making it more responsive to recent price changes.

• For example, if the period n is 20, you would calculate the WMA for a period of 10 (20/2).

Calculate the WMA with a Period of n

• Next, calculate another WMA using the full period (n). Continuing with the previous example, this WMA would be calculated over 20 periods.

Calculate the Difference and Multiply by 2

• Subtract the WMA calculated in step 2 from the WMA calculated in step 1. This difference highlights recent price changes more sharply.

• Multiply the result by 2 to amplify these recent changes. This step increases the Hull indicator's responsiveness to recent price movements.

Apply a Square Root of n Period WMA

• Finally, calculate the WMA of the result obtained in step 3, using the square root of the original period (sqrt(n)).

• This step smooths the amplified changes to produce the final Hull Moving Average.

• In our example, with n = 20, you would apply a WMA with a period of approximately 4.47 (sqrt(20)).
   

Best Hull Moving Average Settings

The period setting determines how sensitive the HMA will be to price changes.

For short-term trading, where quick responses to price movements are essential, using shorter periods like 9 or 13 can make the HMA more reactive.

These settings are ideal for day traders or scalpers who must capture rapid market shifts.

On the other hand, longer periods, such as 21 or 55, are more suitable for identifying long-term trends. These settings provide a smoother HMA, filtering out minor price fluctuations and focusing on the overall market direction.

These settings are often referred to as the best Hull Moving Average settings for different trading styles.
 

How to Use the Hull Moving Average in Trading

The Hull Moving Average (HMA) tool can significantly enhance your trading strategy.

Here are some practical ways to use it:
 

Trend Identification

The HMA helps identify market trends. A rising HMA indicates an uptrend, while a falling HMA signals a downtrend. This information allows traders to align their trades with the market direction.
 

Entry and Exit Signals

HMA crossovers can generate buy and sell signals.

When the price crosses above the HMA, it signals a potential buy; when it crosses below, it suggests a sell.

Using two HMAs of different periods can further refine these signals: a short-term HMA crossing above a long-term HMA indicates a buy, while a crossing below suggests a sell.

This forms the foundation of a Hull Moving Average crossover strategy.
 

Support and Resistance Levels

The HMA can act as dynamic support and resistance levels. In an uptrend, the HMA serves as support where prices may bounce. In a downtrend, it acts as resistance where prices might fall.
 

Combining with Other Indicators

Enhance your analysis by combining the HMA with other indicators like the Relative Strength Index (RSI). For example, an uptrend HMA with a non-overbought RSI strengthens a buy signal, while a downtrend HMA with a non-oversold RSI confirms a sell signal.
 

Combining HMA with Candlestick Patterns

The combination of the Hull Moving Average (HMA) with candlestick patterns can provide additional insights for traders. While the HMA identifies the broader trend and smoothens price action, candlestick patterns can pinpoint precise moments for entering or exiting trades.

• Trend Confirmation: The HMA helps confirm the trend indicated by candlestick patterns. For instance:

  • In an uptrend (rising HMA), bullish candlestick patterns like hammer, engulfing, or morning star are more reliable.

  • In a downtrend (falling HMA), bearish patterns like shooting star, dark cloud cover, or bearish engulfing gain significance.

• Filtering Noise: The smoothness of the HMA filters minor price fluctuations, making it easier to focus on meaningful candlestick signals.

• Dynamic Support and Resistance: The HMA often acts as a dynamic support or resistance level, enhancing the context of candlestick patterns forming around these zones.
   

Practical Ways to Combine HMA with Candlestick Patterns
 

Using Candlestick Reversals at the HMA Line

• The HMA can act as a key level where candlestick reversal patterns occur.

• Strategy:

  • Identify a candlestick reversal pattern (e.g., hammer, shooting star) at or near the HMA line.

  • Confirm that the HMA’s slope aligns with the anticipated direction:

    • Upward slope: Enter long positions on bullish reversals.

    • Downward slope: Enter short positions on bearish reversals.

Crossovers and Pattern Confirmation

• Price crossing above or below the HMA often signals a trend change. Candlestick patterns near these crossovers validate the strength of the signal.

• Strategy:

  • Wait for the price to cross the HMA.

  • Look for confirmation from candlestick patterns to validate entry:

    • Bullish confirmation: Bullish engulfing or morning star after an upward crossover.

    • Bearish confirmation: Bearish engulfing or evening star after a downward crossover.

Multi-HMA Approach with Candlestick Patterns

• Use two HMA lines with different periods (e.g., a short-term HMA and a long-term HMA) alongside candlestick patterns.

• Strategy:

  • A short-term HMA crossing above a long-term HMA confirms a bullish trend. Enter long trades on bullish candlestick patterns like bullish engulfing.

  • Conversely, a short-term HMA crossing below a long-term HMA signals a bearish trend. Enter short trades on bearish patterns like shooting stars.
     

Breakout Confirmation

• The HMA’s dynamic nature complements candlestick patterns during breakout scenarios.

• Strategy:

  • Monitor candlestick patterns that suggest a breakout (e.g., marubozu or three white soldiers) near the HMA.

  • Enter the trade once the breakout aligns with the HMA slope.

Advantages and Limitations of HMA

Here are the advantages and limitations of HMA to consider:
 

Advantages

• Reduced Lag: The Hull Moving Average significantly reduces lag, providing more timely signals than the SMA and EMA.

• Smoother Trends: The HMA offers a smoother view of price trends, making it easier to spot market direction.

• Flexibility: The Hull indicator can be tailored to different trading styles and markets by adjusting the period settings.
   

Limitations

• Complexity: The Hull Moving Average calculation is more complex than SMA and EMA, which might be a downside for some traders.

• Potential Overfitting: In very volatile markets, the HMA's high responsiveness might lead to overfitting, giving false signals.

• Less Effective in Ranging Markets: Like most trend-following indicators, the HMA might not be as reliable in sideways or ranging markets.
   

Conclusion

The Hull Moving Average, developed by Alan Hull, is a valuable tool for traders who want to reduce lag and get a more accurate view of market trends.

By understanding the Hull MA calculation, settings, and uses, you can effectively incorporate the HMA into your trading strategies.  Whether you’re comparing the difference between HMA and SMA, optimizing the best Hull Moving Average settings, or exploring a Hull Moving Average crossover strategy, the HMA can adapt to your needs.

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