HMA (Hull Moving Average)

Introduction

Think of stocks and the next thing that will probably come to your mind is all those charts or graphs with so many different indicators that are supposed to give all kinds of signals about the market.

However the one thing that a lot of indicators have to deal with in some way or another is the market noise and how that can sometimes give the wrong signals.

If there’s anything you can do to filter all that out you would be wise to do it and know that you’re definitely not alone in wanting that even if it could entail shifting to other indicators completely.

Speaking of indicators the one that we’ll look at here is the HMA indicator or the Hull Moving Average and if you want to filter out all that noise then this could be a good start.

What is HMA (Hull Moving Average)?

So what’s the HMA even there for you might be wondering. Simply put it’s a technical analytical tool that was made in 2005 by ALan Hull so that traders could identify trends or trading opportunities.

Just assume it be this new approach to conventional moving averages and something that can provide you with more trustworthy trend identification.

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The Purpose of HMA

So you shoud have guess the whole purpose of  the HMA by now and that’s to place greater emphasis on the most recent price points while smoothing any short-term fluctuation out of the equation.

If you compare it to some of the other MAs you see it may come off as more responsive to trend changes even giving out earlier buy or sell signals.

All in all it’s made to reduce any adverse impact that’s caused by false signals all while lowering the lag that you often witness with such indicators when they identify trends.

How is HMA Calculated?

While you won’t really have to calculate it yourself since it’s already supported on most trading platforms, if understanding how it’s calculated is something you’re curious about then read on, as that’s exactly what this section will be covering.

HMA Formula

The first step is to basically select the number of periods. What Alan Hull himself suggests is picking 16, but traders may use anything that’s suitable for whatever their HMA trading strategies are.

Then once that’s done, they’ll have to calculate two WMAs or weighted moving averages. One WMA for the complete length of time and the other for half that length, i.e., number of periods/2.

The third step basically involves multiplying that shorter period WMA by two and then subtracting the first WMA and doing this will essentially give you the non-smoothed and raw HMA.

But wait there’s two more steps you still need to go through and these are finding the square root of those periods, which you may round down or up to a whole number.

The last step would be to finally calculate the third WMA with the resulting number, and this would be your last Hull Moving Average.

So, the formula for the HMA will end up looking a little something like this: 

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

Key Characteristics of HMA

So basically the key characteristics for the HMA formula would be the WMA and that stands for weighted moving average, n as in the number of periods, and sqrt in there stands for square root. Keep those in mind whenever you’re calculating.

How to Use HMA in Trading

By now you shoud have a clue about what the HMA is capable of so you could now shift your attention to how you may actually do something about it and we’ll be looking at that here.

Trend Following with HMA

First things first you can use the HMA in your trend following endeavors. After all knowing when there’s an uptrend or downtrend wil go a long way in deciding what position you’re going to opt for which can either be short or long.

But how are you going to detect those trends in the first place? Well that’s easy.

If you see that line going up you know you have a bullish market in your hand, and if you see it going down you have a bearish market.

Ideally speaking you want to buy when prices start to go up and sell when they start to go down.

HMA Crossovers

One other way you can go about using the HMA is incorporate different time frames like short ones and a long ones.

The idea is to look for any exit or entry points by just identifying whether there’s a crossover between the long and short HMAs.

If you want you can even use three lines, one short, medium, and long-term line. The long term HMA can be used as an indicator for how the overall trend is looking.

But how to determine when a crossover is bullish or not? To start with if the short term line goes above the longer term one the market might take a turn for the better but if you se the short one going below the longer one, then you have an opposite scenario, aka a bearish crossover.

HMA and Price Action

In addition to crossovers even the price and how it relates to the HMA indicator can be an indication of how the market has been performing lately.

So if you see the price of your stock moving below or above the HMA, you may have a possible change of trends.

If the price goes above, then it could be a bullish trend and it could be bearish if it goes below the HMA.

HMA and Reversal Detection

This is where we should mention divergences. Sometimes you wil come across discrepancies between existing price movements and the HMA.

If prices hit new lows or highs but you don’t see the HMA following suit it coud mean that the trend might be weakening, possibly indicating an upcoming reversal of sorts.

HMA Strategies for Different Trading Styles

Let’s see how the HMA can relate to some of the most wellknown trading styles within the landscape. We’re of course talking about day, swing and long term traders.

Day Trading with HMA

If you happen to be more on the day trading end, then you may use shorter time frames to reflect what’s normally associated with day trading goals, namely short term gains. You could follow trends and use scalping as one of your primary trading strategies.

Swing Trading with HMA

But if swing trading is something you find more interesting, then medium to long time frames shoud be more to your liking when you’re using the HMA indicator.

And because of all that extra time you’re giving yourself to work with you could make more use out of reversals or crossovers.

Long-Term Investing with HMA

If the long term sounds more appealing to you as a trader then with the Hull Moving Average you can change your time frames to something that suits that.

Also because of that you might be more advantaged from strategies that involve divergences or even crossovers of breakouts.

Advantages and Limitations of HMA

But before you go about including the HMA within your trading endeavors you might want to know more about its limitations and benefits

At least with this you could leverage those strengths while mitigating its weaknesses.

Benefits of Using HMA

Starting with those advantage, it can quickly react to the latest price changes, can smooth out a bit of that noise, is flexible when it comes to tie frames, and can support various trading strategies.

Limitations of HMA

Now on to the negativess, firstly the potential for false signals is still there albeit occasionally. Second it’s sensitive to short-term and rapid price movements and finally, its complexity as an indicator can make it difficult for newcomers to get a good grasp of how to best use it.

Conclusion

 The HMA or Hull Moving Average can be a valuable technical analytical tool, capable of offering traders with a more responsive and smoother way to analyze price action.

The reason why Alan Hull even made it was to tackle the many problems pertaining to lag and the possibility of noise left by your conventional moving averages like the EMA, the SMA, and the WMA.

But remember that a lot of the time whatever use you may get out of the indicator largely depends on whether or not you’re making the most of what it has to provide.

This is why selecting the right timeframes and parameters is important but don’t let that stop you from experimenting every now and then too. You want to find out what works for you too after all.