Investing with the Hull Moving Average

Stock prices can fluctuate widely on a day-to-day basis, which, over time, create a trend. Traders can use a technical analysis tool such as moving averages to identify which way a trend is moving and to anticipate whether it’ll continue. If the moving average is rising and the stock price is primarily staying above that average, the stock is in an uptrend and vice versa for a downtrend.

Moving averages on volatile data like stocks can become jagged when moving average lengths are shortened to move more in line with the stock. Figure 1 shows a chart using a four-period moving average. 

To address this, traders can lengthen the period used for the moving average. Figure 2 shows the same moving average but with 16 periods. 

To address these two issues, Allen Hull created a new moving average calculation in 2005 called the Hull Moving Average (HMA), which aimed to reduce this lag time. Let’s look at how the HMA works.

Figure 3 graphs three moving averages (Hull, weighted, and simple) each using the same length for calculation (16 periods). The red line is the Hull, orange line is the weighted, and the green line is the simple.

Traders sometimes look for the moving average to change direction before confirming a trend change. 

Using figure 3 as an example, let’s examine each moving average and when it signaled a trend change:

•  The red arrow highlights the point when the HMA changed direction, confirming the trend change signaled by price.
• The orange arrow highlights the point when the WMA changed direction, confirming the trend change signaled by price. This occurred after the Hull confirmation.
•  The green arrow highlights the point when the SMA changed direction, confirming the trend change signaled by price. This occurred after the Hull confirmation and after the weighted confirmation.

Figure 3 is illustrating a major benefit of the HMA—it has the same type of smoothness as the weighted and simple and thus reduces and practically eliminates lag times found in other moving averages. For this reason, active traders who look to capitalize on changes in trend and related price movement find the Hull moving average useful.

At this point, you could load up the HMA in thinkorswim® from TD Ameritrade and start implementing it in your trading. But if you want to dig into the details of how the HMA works, here’s how it’s calculated. (Fortunately, traders can use it without fully understanding this complex calculation.)

For this example, we’ll use 16 as the length for the HMA calculation:

1.       Calculate the WMA for the full length (16-day WMA)

2.       Calculate the WMA for half the Length (8-day WMA)

3.       Subtract step 1 result from step 2 (find the difference between WMA of 16 and 8 lengths)

4.       Add step 3 to step 2 (add difference to WMA 8 day)

5.       Calculate the square root of the full length (v16 = 4)

6.       Calculate the WMA of step 4 using length of step 5

When using the Hull moving average for trading, it’s important to remember that it was developed to eliminate lag time between price and the average itself. For this reason, it’s useful for traders who are looking for early signals of potential trend changes. Active traders find it useful as a standalone indicator. Because the HMA is built to decrease lag times of moving averages, it’s usually not used as part of a moving average crossover system as these systems reintroduce lag times.