The Hull Moving Average (HMA) is a technical analysis indicator that aims to reduce the lag inherent in traditional moving averages. The HMA was developed by Alan Hull, an Australian trader, in the late 1990s. Before we dive into the details of how the HMA works, let's first understand the concept of Moving Averages.
Moving Averages
Moving Averages (MA) are one of the most widely used technical indicators in trading. They are used to identify the trend direction and support/resistance levels. A moving average is calculated by taking the average price of a security over a certain period. The period can be set for any desired length. The most commonly used periods are 50, 100, and 200.
The major drawback of traditional MA is that they are lagging indicators. They are calculated based on past prices and do not reflect the current market conditions. Many traders try to overcome this lag by reducing the period length in their moving averages. However, this can lead to increased false signals and whipsaws.
The Hull Moving Average
The Hull Moving Average aims to reduce the lag in traditional moving averages by using weighted moving averages and a square root of a period. The formula for the HMA is complex, and we do not need to go into the details of it. It is calculated using three weighted moving averages and a square root of a period in a way that reflects the current market conditions, reducing the lag.
The HMA uses a period length selected by the trader, but unlike traditional MAs, it uses a square root of the period length to weight the calculations, making it more responsive to price changes while still reducing noise and false signals. This makes it a better indicator for identifying trend direction, support, and resistance levels.
How to Use the Hull Moving Average in Trading
The HMA is most effective when used in conjunction with other technical indicators or price action analysis. The most common way to use the HMA is to identify the trend direction. When the HMA is sloping up, it indicates an uptrend, and when it is sloping down, it indicates a downtrend. This can be used to identify long and short trade entries.
Another way to use the HMA is as a support/resistance level indicator. When the price is above the HMA, it indicates potential support, and when the price is below the HMA, it indicates potential resistance. Traders can use this to identify trade exits and take profits.
The Bottom Line
The Hull Moving Average is a useful technical indicator for traders looking to reduce the lag in traditional moving averages. It is most effective when used in conjunction with other indicators and price action analysis. Using the HMA can help traders identify trend directions, support and resistance levels, and potential trade entries and exits.
As with any technical indicator, traders must test the effectiveness of the Hull Moving Average in their trading strategy before using it with real money.