A common technique is to use a moving average in order to smoothen out price data and study price movements in the market. Chartists often use the exponential moving averages (EMA) and the simple moving averages (SMA) to identify the dominant market trend. However, almost all moving averages are subject to price lag. The Hull moving average is a significant improvement on the existing. It virtually eliminates price lag and makes the moving average more responsive to price activity.
We will now discuss the Hull moving average and how to interpret various trading signals.
Let's first understand what a moving-average is before we get into the discussion about Hull moving average (HMA).
The Moving Average is a method to determine price trends and their effectiveness. The most common type of moving average is a simple moving average. It calculates the arithmetic average of a set price points over a specified number of days. It is therefore a lagging indicator. The longer the time period, the greater the lag. It is highly customizable so investors can set it up for their own time frames. The most important trading signals are 50-day, 100-days and 200-days SMAs. Investors can also examine 15, 20, and 30days SMAs.
The exponential moving average is another popular indicator of moving averages. It calculates the weighted mean that gives more importance current price data. This makes it more responsive.
In 2005, Alan Hull proposed a new moving-average indicator that would eliminate price lag. The new indicator was named the Hull Moving Average Indicator, or HMA.
Hull's moving average solves the age-old problem of moving average. It responds to current prices and curve smoothness. It's fast, easy, and very useful.
Hull used a 16-week simple moving average to calculate the weighted average (WMA), of the most recent price data. He then divided the period by 2. Although the calculation can be complicated, this is how you should understand it.
Hull used a weighted average method to calculate his formula
He calculated the WMA for the series at the beginning, i.e. 13-week period.
The series is then divided into two and the integer value used to calculate the second WMA.
Add the second WMA to the first WMA and multiply it by 2.
Calculate the square root, and then take the integer value to calculate WMA 3. This is the result of the first two WMA.
Here's the mathematical formula for Hull's moving average indicator
HMA = WMA(2*WMA(n/2) - WMA(n)),sqrt(n))
It is possible for the result to be slightly overestimated, but this can be used to offset any lagging effect.
Moving averages are often lagging indicators. This means that they indicate price changes later than direct change. The Hull moving average solves this problem and improves the smoothness in the price curve.
Investors can adjust Hull moving average to suit their needs. The market trend can be revealed by studying the Hull moving average over a longer period. Short-term studies can also be used to plan entry.
If the average moving line is increasing, the trend is upward. A falling HMA is indicative of a declining trend. When HMA is rising, investors enter a long position.
HMA is a calculation of HMA for shorter periods that investors use to plan entry in the trend's direction. When HMA is rising, it is a long entry signal. In contrast, HMA falls triggers a short entry signal.
A chart will show a blue line that represents the Hull moving mean. If the line moves rapidly it is indicative of a sideways trend.
The challenge of using the moving average formula is eliminated by Hull moving average. It is important to avoid this when analysing crossover signals as the HMA technique relies on lags.
You now have the Hull moving average. This can be used in your trading strategy to analyze market trends and plan entry.