Hull Moving Average: How to read it and how to use it

The Hull Moving Average is a useful tool for traders. Here, we will show you how it works and how to use it.

hull moving through the water                                 


What is the Hull Moving Average?

The Hull Moving Average  (HMA) is one of many analytic tools that can be used to measure the direction of a trend in the market. It was created in 2005 by the Australian stock market trader Alan Hull, hence the name. To put it in its creator’s own words:

‘The Hull Moving Average solves the age-old dilemma of making a moving average more responsive to current price activity whilst maintaining curve smoothness. In fact the HMA almost eliminates lag altogether and manages to improve smoothing at the same time’

It came about when Hull was looking at a way to solve the problem of lags in moving average. In other words, he wanted to keep the chart showing the average price of a stock or commodity as clear and up-to-date as possible while making sure that the line which represented the average price was still smooth. To do this, he created his own particular tool, the Hull Moving Average indicator. 

How to use the Hull Moving Average

The Hull Moving Average helps traders to see where a price has been, without it getting too vague or too out-of-date.

Typical Hull Moving Average chart

If we take a look at the Hull Moving Average indicator, we can see that it moves quicker and further than the standard moving average. This is because the Hull Moving Average is designed to eliminate lag and can therefore be faster and smoother than the Standard Moving Average.

A trader looking at this chart would also see when the price was moving down, meaning it could be time to sell, and when it moved up, which would suggest a good time to buy.

How to calculate the Hull Moving Average

How do you work the Hull Moving Graphic out? There are a few steps, but it is comparatively straightforward. You take a number of periods. Alan Hull suggests 16 although you can use any number. You work out two weighted moving averages (WMAs). One of them is for the entire length of time and the other is for half its length. Then, you take the weighted moving average for the shorter period and multiply it by two, then you subtract the first WMA from that. This will give you the raw, or non-smoothed Hull Moving Average. You then find the square root of the number of periods, rounded up or down to the nearest whole number, and then use that to work out a WMA from the raw HMA. This gives you the final Hull Moving Average.

The Hull Moving Average formula looks like this:

The Hull Moving Average formula

You might wonder why you need to round up or down. This is because this process smooths the result, making it easier to make sure the line stays close to the price while remaining smooth.

How to read the Hull Moving Average

How to read the Hull Moving Average

If we look at this chart, we can see that the Hull Moving Average is a smooth blue line which follows the overall pattern of the green price chart. We can see that it shows us the overall changes largely as they happen, without it getting caught up in changes which deviate from the overall trend. A trader can use the chart to see how the market is moving and use the movements in the direction of the Hull Moving Average to know when to buy or sell.

The drawbacks

As with all tools, there are disadvantages to using the Hull Moving Average. For instance, it can tell you about what has happened, but it cannot tell you what is going to happen. Also, while a lot of moving averages use crossover signals to help traders make decisions, that is not the case with the Hull Moving Average. In fact, Alan Hull himself recommends against using crossover signals because that relies on an element of lag, which is something the HMA is designed to eliminate. Also, you have to remember that only using one kind of analytic tool is a recipe for disaster. Traders who successfully use a Hull Moving Average strategy will use the HMA in conjunction with other tools to help them get a bigger, wider, picture of a market. And, as ever, you need to remember to do your own research, remember that the price of a stock, commodity, or cryptocurrency can go down as well as up, and never invest more money than you can afford to lose.

Further reading

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