Using a moving average to smooth out price data while studying price movement in the market is a common practice. Chartists use the simple moving average (SMA) and exponential moving average (EMA) regularly to understand the dominant trend in the market. But almost all moving averages lag in price. Hull moving average is an improvement over the existing, which virtually eliminated any price lag and made the moving average responsive to price activity.
So, we will discuss what Hull moving average is and how to interpret different trading signals from it.
What Is A Moving Average (MA)?
Before we begin the discussion on Hull moving average (HMA),let’s understand what a moving average is.
Moving average is a trade indicator method used for their effectiveness to understand price trend. A simple moving average is the most common example of moving average. It takes the arithmetic mean of a set of price points for a specific number of days in the past. As a result, it is a lagging indicator, and more prolonged the time period, greater is the lag. However, it is also highly effective because investors can easily customize it for different timeframes to suit their requirements. Use of 50-days, 100-days, 200-days SMAs is common as they give the most crucial trading signals. But investors also study 15, 20, 30days SMAs.
Another popular moving average indicator is the exponential moving average, which calculates the weighted average that gives more importance to current price data, making it more responsive.
What Is Hull Moving Average Indicator?
Alan Hull in 2005 proposed a new moving average indicator that will eliminate price lag. After his name, the new indicator became known as the Hull moving average Indicator or HMA.
Hull moving average solves the age-old dilemma of moving average, making it responsive to current price while manages curve smoothness. It is fast, smooth, and useful.
In his calculation, Hull used 16 – week simple moving average and then calculated the weighted moving average (WMA) of the very recent price data, after dividing the period by two. The calculation is a bit complicated, but here is the best way to understand it.
In his formula, Hull used a weighted moving average method
He first calculated the WMA of the series, say 13 weeks period.
Next, the series is split into two, and the integer value is taken to calculate the second WMA
multiplied the seconds WMA by two and subtract the first WMA from it
Calculate the square root and take the integer value to calculate the third WMA, a result of the first two WMA
Here is the mathematical formulation of Hull moving average indicator
HMA = WMA(2*WMA(n/2) − WMA(n)),sqrt(n))
The result might have a slight overestimation, which is handy to offset any lagging effect.
How To Interpret Hull Moving Average Indicator
Most moving averages are lagging indicators, which means direct change indication comes late than price change. Hull moving average fixes this problem, and along with improves the smoothness of the price curve.
Investors customise Hull moving average for different timeframes to understand price trend. Study of an extended period Hull moving average reveals market trend and the short period studies are used to plan an entry.
Planning Trade Using Hull Moving Average Strategy
When the average moving line is rising, then the prevailing trend is upward. Similarly, a falling HMA indicates a falling trend. Investors enter a long position when HMA is upward.
HMA calculated for shorter periods used by investors to plan entry in the direction of the trend. It is a long entry signal when HMA is rising. Conversely, short entry signal triggers when HMA falls.
In a chart, a blue line represents the Hull moving average, when the line changes direction rapidly, it indicates a sideways trend.
Hull moving average successfully eliminates the challenge of using moving average formula. However, one must be careful to avoid it in analysing crossover signals because of the technique of calculating HMA relies on lags.
Now that you have learned Hull moving average, you can use it in your trading strategy to study market trend and plan entry without worrying about lagging effect.