There are many indicators that traders use to predict changes in the direction of price. We have a few popular technical indicators like MACD, or RSI. In this article, let's learn about one more indicator — Hull Moving Average.

What is Hull Moving Average

The Hull Moving Average (HMA) was developed by Alan Hull for the purpose of reducing lag, increasing responsiveness while at the same time eliminating noise. Alan Hull tried to develop an indicator that responds faster to trend changes, while it retains its smoothness, The Hull Moving Average attempts to minimize the lag of a traditional moving average while retaining the smoothness of the moving average line. In order to achieve this, Alan Hull used two different weighted moving averages (WMAs) of price, plus a third WMA to smooth the raw moving average. 

Calculation

The formula to calculate a Hull Moving Average is the following.

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

Where

n = Time Periods

WMA = Weighted Moving Average

How Does Hull Moving Average Work

The Hull Moving Average indicator works in the same way as traditional moving averages, it’s an improved version of a moving average that tries to respond to the market movement in time, with less lag. The strategies which use HMA are similar to those that use classic moving averages.

To add an Hull Moving Average indicator in cTrader Fondex, follow the steps below:

1. Right Click on the chart and navigate to Indicators > Hull Moving Average 

2. Click on the Hull Moving Average indicator and the following will pop up:

3. Select Source, Periods and Shift and click OK. The indicator will be plotted on your chart

Hull Moving Average Strategies

Hull Moving Averages can be used to identify trending markets, as well as to anticipate trend reversals.HMAs can be used for support and resistance levels is another major use of the indicator. HMA is ideal to point out where to expect a price reversal, a breakout and the formation of new trends. Below we will describe some popular strategies using the Hull Moving Average.

HMA Golden Cross and HMA Death Cross

Two popular strategies where the Hull Moving Average can be used are the golden cross and the death cross. Two Hull Moving Averages are needed to identify entry and exit points on charts. These are a 50 period HMA and a 200 period HMA. A golden cross indicates a buy signal and occurs when a faster - 50 period Hull Moving Average crosses over a slower - 200 period Hull Moving Average from below, and a death cross occurs, which signals a sell signal, when a faster - 50 period Hull Moving Average crosses over a slower - 200 period Hull Moving Average from above. Below we can see two examples, one of an HMA golden cross and one of an HMA death cross, taken from Fondex cTrader charts.

A golden cross between the two HMAs is usually associated with the formation of a bullish trend. The trend is defined by the short-term HMA, while the long-term HMA indicates a strong resistance level. In the scenario above, the short-term HMA has reversed direction, and as soon as it crosses the longer-term HMA from below, breaking the resistance level, we have an indication that higher prices may follow. See the example below. The short-term HMA is depicted in red and the long-term HMA in blue.

On the opposite side, a bearish trend formation is signaled where a death cross between the two HMAs might be the signal for the formation of a bearish trend. Again, the short-term HMA serves as a trend direction indicator, but in this case the long-term HMA may identify a support level. In the death cross scenario below, the short-term HMA has taken a downwards path and as soon as it crosses the longer-term HMA from above, breaking the support level, we have an indication that lower prices might be expected.

HMA Ribbons

A technique to evaluate the strength of a trend is using moving average ribbons. Hull Moving Average ribbons are a collection of Hull Moving Averages of different lengths that are added on the same chart to form ribbon-like indicators. The strength of the trend is determined by looking at the distance between HMA indicators. The wider the distance between the HMA indicators, the more strength the trend might gain. HMA ribbons are also used to identify key areas of support or resistance by looking at the price in relation to the ribbon. Finally, HMA ribbons could be used to signal potential trend changes when the price moves through the ribbons, or the ribbons cross each other. Below we can see an example of HMA ribbons plotted on Fondex cTrader.

Three HMA Crossover Strategy

The three HMA crossover strategy could be considered as another popular trading strategy consisting of three HMA indicators plotted on the chart. The most usual setup consists of a short-term HMA at 20 periods, a medium-term HMA at 40 periods, and long-term HMA at 60 periods. The Triple HMA crossover strategy signals a buy as soon as the short-term HMA is higher than the medium-term HMA and the medium-term HMA is higher than the long-term HMA. When the short-term HMA is back below the medium-term HMA, the strategy signals an exit from the position. The opposite is true for short trades. Below we can see some examples of buy and sell signals using the three HMA strategy.

In the chart above, we can observe that as soon as the 20 and 40 period HMA indicators cross below and above the 60 period HMA indicator -  a trend towards the respective direction is formed, confirming the validity of the respective signals.

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