Hull Moving Average: A Forex Trader’s Guide

If you’re diving into the exciting world of Forex trading, you’ll quickly encounter a variety of tools designed to help you make informed decisions. Among these, moving averages are particularly popular. They filter out some of the “noise” in price data, helping to identify the underlying trend. One of the more sophisticated moving averages, and the focus of this guide, is the Hull Moving Average (HMA). This article breaks down the HMA into simple, understandable terms, so you can grasp its function and potential benefits in your trading strategy.

What is a Moving Average?

Before we delve into the specifics of the HMA, let’s first understand what a moving average (MA) is in general. A moving average is a calculation that smooths out the price movement by averaging the price data over a specific period. Think of it as a line that tracks the overall direction the market is moving in, rather than the price jiggling up and down every minute or hour. Standard moving averages, like the Simple Moving Average (SMA) and Exponential Moving Average (EMA), are calculated by taking price data from the past, either equally weighting or weighted by age.

The most common moving averages are Simple Moving Average (SMA), which averages price points over a given period, and Exponential Moving Average (EMA), which gives more weight to recent price data. While these are useful, they can suffer from lag, meaning they react to price changes a bit slowly. This is where the Hull Moving Average steps in.

Introducing the Hull Moving Average (HMA)

The Hull Moving Average, created by Alan Hull, is designed to reduce lag compared to traditional moving averages. It aims to be much more responsive to recent price changes while still maintaining a relatively smooth curve. Unlike standard moving averages, the HMA doesn’t just average prices. It uses a complex weighting system and series of calculations to achieve faster reactions to changes in price trends. It’s considered a more advanced averaging method because of this.

How is the HMA Calculated?

The HMA calculation is a bit more intricate than that of the SMA or EMA, but the basic idea can be broken down. Here is a simplified explanation of the steps involved:

  1. Weighted Moving Average (WMA): The HMA starts with a weighted moving average calculation. A WMA weights recent price data more heavily than older data.
  2. Combining WMAs: The HMA uses multiple WMAs calculated with different periods, and they’re then combined strategically. This is how the HMA reduces lag.
  3. Weighted Difference: The core of the HMA calculation then takes the difference between two WMAs calculated with different periods and weights them using specific equation to produce the final value.

It’s not necessary to perform these calculations by hand. Most trading platforms will include HMA as an indicator that automatically performs these calculations and visually plots the moving average on your chart.

Why Use the Hull Moving Average in Forex Trading?

The HMA has several advantages that make it a popular choice among Forex traders:

  • Reduced Lag: As we’ve learned, the primary advantage of the HMA is its ability to reduce lag. This means that it reacts to price movements more quickly than SMA and EMA, providing traders with earlier entry and exit signals.
  • Smoother Curves: Despite reacting faster, the HMA maintains a smooth curve that’s much less choppy than other quicker-reacting indicators. This allows for a clearer view of the trend without the distortions of faster-reacting or heavily fluctuating price action.
  • Improved Accuracy: By reacting faster with smoother curves, the HMA is often seen as providing more accurate trends signals.

However, it’s also important to understand the limitations of HMA.

  • False Signals: Just like any indicator, the HMA can still sometimes generate false signals if used in isolation.
  • Not a Perfect Predictor: It’s vital to remember that while it indicates the general direction, the HMA does not guarantee future price movements, just as no other indicator or analysis ever can.

How to Use the Hull Moving Average in Trading

The HMA can be used in a variety of ways within a Forex trading strategy. Here are some common applications:

Trend Identification

Like all moving average lines, the HMA’s main advantage lies in detecting the start and end of trending markets. When the HMA is moving upwards, it generally suggests an uptrend or bullish activity in the market; if the HMA is moving downwards, it indicates bearsh sentiment.

Crossovers

Traders use a ‘crossover’ strategy, where a faster HMA (shorter period) signal crosses a slower HMA (longer period) signal or a crossover with price action to get trading signals. A crossover of the faster HMA above the slower one can signal a buying position. Conversely, a crossover of the faster HMA below the slower one could indicate a sell entry point.

Confirmation

Many traders utilize the HMA in conjunction with other indicators as confirmation. For instance, a trader might only enter a trade if the HMA confirms price action signals, and also a particular signal from another indicator. It can make the trade confirmation more reliable and reduce the chances of false market entry.

Choosing the Right HMA Period

One of the critical factors to consider when using the HMA is the period you set. The period determines how many data points are used in the calculation and will affect how quickly and how sensitively the HMA react to price movements. A shorter period (e.g., 9 or 10 periods) will make the HMA very responsive and more reactive to price changes. A longer period (e.g., 50 or 200) will smooth the HMA and make it less sensitive to short-term changes but is useful for overall trend identification. There is no universally correct period, so it needs to be tested by the individual trader as the best period is often strategy and currency pairing specific. Common periods are 9/10 for shorter-term trades, 20-50 for day trading and 100+ for long-term trading.

Practical Example using a Trading Platform

Most trading software platforms include the HMA as an indicator. To add the HMA to your chart, you would go to your trading platform’s indicators section and type in Hull Moving Average. Set the period you will be evaluating and then the HMA line will be calculated and appear on your chart, plotted right on the currency price data.

For instance, if you’re using a 30 minute timeframe, where each candle chart represents 30 minutes of price action, and you’ve plotted a Hull Moving Average with a period of 20, the HMA is calculated using 20 previous 30-minute price periods.

Now, if you’re identifying a potential trend, you might look for the HMA trending upwards as your indicator that a price movement uptrend could be developing. If you use HMA crossovers, note that when a HMA line using the shorter period crosses a HMA line using the longer period from below, that could indicate a potential buy entry point. Conversely, if the shorter HMA period’s line crosses the longer period HMA line from above downwards, this could be a sell signal.

Conclusion

The Hull Moving Average is a powerful tool for any Forex trader, especially for those looking for a moving average that balances responsiveness and smoothness. It reduces lag and helps traders identify the market direction effectively when used appropriately. However, like all technical indicators, the HMA is best used in conjunction with other indicators and sound risk management principles. Thoroughly backtesting any indicator is extremely important. Always test the indicators and tools to ensure they align with your trading style and strategy, and never make trading decisions based on a single indicator alone.

Frequently Asked Questions (FAQ)

Is the HMA better than other moving averages?

The HMA’s reduced lag makes it more responsive than traditional MAs like SMA and EMA, which can be very beneficial for particular types of analysis. However, “better” depends on your trading style and objectives. Each MA type has its use and limitations.

Can I use the HMA on all timeframes?

Yes, HMA can be used on any time frame. However, shorter time frames may show noise and greater sensitivity while longer time frames will provide a smoother picture, useful for macro-trends. Experiment to see which timeframe best suits your trading strategy.

What settings work best with HMA periods?

There isn’t a magic number. It depends on market conditions and your trading style. Experiment with different periods, and ensure to backtest your findings. Consider using shorter periods for faster signals but be aware that such settings might produce more false alerts.

Is the HMA a perfect predictor?

No. The HMA provides an indication of the market direction based on past price movements, but it is not a perfect predictor of future ones. It’s important to always use risk management strategies.

Can I combine the HMA with other indicators?

Yes. It’s highly recommended to use the HMA alongside other indicators and analysis tools for confirmation before executing any trading decision. This can help mitigate the risk of false signals.

References

  • Hull, A. (2005). The Hull Moving Average. Technical Analysis of Stocks & Commodities, 23(1).
  • Murphy, J. (1999). Technical Analsyis of the Financial Markets. New York Institute of Finance.

Are you ready to trade? Explore our Strategies here and start trading with us!