Hull Moving Average, developed by Alan Hull is an extremely useful indicator to overcome the lag associated with traditional moving averages. Probably moving average is the simplest of all indicators but still it is the most essential component of traders’ toolbox. It aids to follow and stay with the ongoing trend, whether bullish or bearish. Any reversal in trend is indicated by directional change or crossover of moving averages.
But the major problem with moving average is that it signals trend reversal few candles after it actually happened. Any trend follower must have come across the situation where he booked profit at a point which is lower than the max unrealized profit for the trade. This happens because of this lag associated with moving average or any other trend following indicator. In order to overcome this lag, there are other variations of moving average available namely Exponential moving average or Weighted moving average. But they too lag a little and are not 100% accurate.
Hull moving average, on the other hand, reduces this lag almost 99.9%. It is extremely fast and reactive to price movements. Also it is relatively smoother as compared to any other trend following indicator.
Also Read: McGinley Dynamic Trading System
Hull Moving Average Chart
Hull moving average has found a spot in all major charting platforms around the world. Check the below Nifty chart from TradingView where Hull moving average is overlayed along with simple moving average and exponential moving average. Clearly Hull moving average indicates trend reversal faster and accurately than other two.
Hull Moving Average Calculation
Hull moving average is calculated using Weighted moving average. Below is the formula for calculation:
HMA= WMA(2*WMA(n/2) − WMA(n)),sqrt(n))
HMA– Hull moving average
WMA– Weighted moving average
n: time period
Hull Moving Average Trading System
It’s pretty easy and straightforward to trade using Hull moving average. You need not to observe a bunch of indicators and price action, this single indicator would let you stay with the trend. Here are some of the trading ideas using HMA:
- Buy when HMA is rising, Sell when HMA is falling.
- Buy when the price candle closes above HMA line, sell when price candle closes below HMA line. Conservative traders may wait for multiple candle close.
- Plot two HMA’s in the chart of different lengths. For ex: HMA(5) and HMA (13). Buy when HMA(5) crosses above HMA(13), Sell on vice versa.
- Stop loss for all the above trades should be maintained at ATR.
Note: The time period or length of HMA should be selected based on the instrument you are trading. It depends on variety of factors like volatility, beta value etc. Though there is no definite rule, but HMA(20) works best for most of the instruments.
Also Read: How to create your own Trading System?