Hull Moving Average Forex Trading Strategy

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Hull Moving Average Forex Trading Strategy

Moving averages are probably one of the most popular indicators used by traders. It is simple, logical, and more importantly it works. In fact, most profitable traders have some sort of moving average as part of their strategy.

Different Ways to Use Moving Averages

There are several different ways of using moving averages.

One way of using moving averages is as a trend bias indicator, or some sort of trend direction filter based on moving averages. For example, on the chart below, price has been staying below the 200 Exponential Moving Average (EMA).

On this type of long-term downtrend market condition, based on the 200 EMA, a trader could say he would only take sell trades. That is his trend direction bias.

Another way of using moving averages is as a dynamic support or resistance. Prices tend to bounce off popular moving averages as most traders who were looking to enter the market based on the trend direction would often see such prices as a discount. On the chart below, notice how price conveniently bounced off a moving average, which acted as a dynamic support.

Also, another popular method of using moving averages as a standalone strategy is through crossovers. These are entry signals generated as moving averages crossover signifying a change in trend direction. On the sample below, notice how the bearish reversal was confirmed as the moving averages crossed-over.

A Different Way

Although the three methods of using moving averages above are what is commonly used by most traders, there are other different ways to use moving averages. One of which is the method developed by Alan Hull using the Hull Moving Average (HMA).

The Hull Moving Average (HMA) is basically a moving average that puts more weight on the most recent candles. It takes into account the Weighted Moving Average (WMA). By doing this, it loads up more of the weight on the most recent candles, making the moving average more reactive to the current price. The result is a moving average which turns a lot quicker as price change directions.

Now, what does this give us? This allows traders to use the turning of the Hull Moving Average as the entry signal to enter the market earlier than most traders would. As price would start to head up, the HMA would also tend to point upwards, if price reverses downwards, it also points down. This turning up and down would be a less lagging entry signal as compared to the crossover strategy.

Strategy Concept

This strategy would revolve around the Hull Moving Average (HMA) and the method it is supposed to be used as. Instead of using the usual crossover as an entry signal, we will be using the changing of direction of the HMA as our entry signal. It is possible to do this by eyeballing when the HMA is changing direction, however, there are custom indicators that allows the HMA to change color as it changes direction. For ease of use, we will be using this type of custom indicator. As the HMA turns green, indicating that the HMA is turning upward, we will be buying the pair. If the HMA turns blue, indicating a downturn, we will be selling the pair.

On top of this entry signal, we will also be adding in one of the ways to use the usual moving averages. We will use the 200 Exponential Moving Average (EMA) to filter out the trend direction based on the long-term trend. We will only be taking buy signals if price is above 200 EMA, and only sell signals if price is below 200 EMA.

Currency Pair: any

Timeframe: 5-minute chart and above

Buy Trade Setup

Entry

  • Price should be above the 200 EMA (brown)
  • Enter a buy market order as the HMA turns green

Stop Loss

  • Set the stop loss at the minor swing low below the entry candle

Take Profit

  • Set the take profit target at 2x the risk on the stop loss

On this trade setup, the buy entry did work. In fact, there could be a lot more squeezed out of that trade if we didn’t use a take profit target as our exit. However, on the previous entry, we could have been shaken out of an otherwise profitable trade because the HMA did reverse a little, only to bounce off on the area a little above the 200 EMA.

Sell Trade Setup

Entry

  • Price should be below the 200 EMA (brown)
  • Enter a sell market order as the HMA turns blue

Stop Loss

  • Set the stop loss at the minor swing high above the entry candle

Take Profit

  • Set the take profit target at 2x the risk on the stop loss

On this sample trade setup, price did go in our favor and eventually hit the profit target after a few consolidation candles. On this chart, there are also several possible entry setups that could have worked because this long-term trend did last for some time. However, there are entry candles that would be too long and too far from the moving averages. This could mean that the currency pair might already be too overextended, which in my opinion is quite risky.

Conclusion

This mix of moving average usages using the commonly used Exponential Moving Averages and the custom Hull Moving Average is a good way to trade the market. It is very logical as we are trading with the trend with these setups. By doing so, we are stacking the odds in our favor.

Another advantage of this strategy is that the Hull Moving Average tends to be less lagging than the usual moving average crossover entries. By doing so, we increase our odds because by entering the market a little earlier, we could assume that there is still some space for price to move and hit our targets.

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