The Hull Moving Average (HMA) is a popular pricing average type, developed by Alan Hull in 2005 to address some of the shortcomings of traditional moving averages, such as lag and noise. The HMA addresses these issues by using weighted moving averages to smooth out price data and reduce noise. It is based on a weighted moving average calculation that places a greater weight on recent price movement. The formula used to calculate the HMA involves three steps:
- Calculate the weighted moving average for half of the specified time period.
- Calculate the weighted moving average for the full specified time period.
- Calculate the weighted moving average for the square root of the specified time period.
The HMA is then derived from the difference between the second and third weighted moving averages. The resulting HMA line may be smoother than traditional moving averages, making it easier to identify trends in the market.
Traders using the HMA indicator may consider the following events in determining trade entry and exit:
Underlying price crossing the HMA line: When the price of an asset crosses above or below the HMA, it may signal a change in trend. If the price crosses above the HMA, it may indicate a bullish trend, while if it crosses below the HMA, it may indicate a bearish trend.
HMA line slope: The slope of the HMA can also provide insight into the strength of the trend. If the HMA is sloping upward, it may indicate a bullish trend, while a downward slope may indicate a bearish trend. A flat slope may indicate a ranging market.
HMA crossovers: Like other moving averages, HMA crossovers can also provide signals. When a shorter-term HMA (such as a 9-period HMA) crosses above a longer-term HMA (such as a 21-period HMA), it may indicate a bullish trend, while a shorter-term HMA crossing below a longer-term HMA may indicate a bearish trend.
Price and HMA divergence: If the price of an asset is making higher highs or lower lows, but the HMA is not, it may indicate a divergence and suggest that the trend may be weakening or reversing.
The following parameters can be adjusted based on the individual trader's preferences and risk tolerance:
Price: The HMA can be calculated using different types of price data, such as closing price, open price, high price, or low price. The most commonly used price is the closing price, but traders can choose to use other types of price data if they believe it provides a better representation of the security's performance.
Length: The number of data points that the HMA is calculated over.
HMA Indicator on chart
*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.