Zero Lag Hull Moving Average (HMA) – Rules, Settings, Strategy, Returns
Moving averages are known to reduce market noise and smooth the price data, but that often comes with a lagging tendency — this is what makes the Zero Lag Hull Moving Average (HMA) a special indicator. What do you know about this indicator?
The Zero Lag Hull Moving Average (HMA) is a modification of the Hull Moving Average, created by Alan Hull, to further reduce lag and maintain a smooth curve for better trend analysis. It is derived by doubly smoothing the price data using the Hull Moving Average technique by applying the calculation twice — the first time calculates the initial HMA from the price data and the second one uses initial HMA data to calculate a new HMA.
In this post, we will take a look at most of the questions you may have about the Zero Lag Hull Moving Average: what it is, how it works, and how you can use it to improve your trading strategies. Keep reading!
Key takeaways
- Zero Lag HMA is an improved version of the Hull Moving Average (HMA) designed to further reduce lag while maintaining a smooth trend curve.
- It achieves this by applying the HMA calculation twice, using different period lengths.
- The Hull Moving Average technique itself is based on a weighted moving average of the difference between two weighted moving averages of price data.
- The Zero Lag HMA is even more responsive than the regular HMA, offering a near zero-lag moving average for better trend tracking.
- When plotted together, the Zero Lag HMA acts as the main indicator line, while the regular HMA serves as the signal line.
- Crossover signals between the Zero Lag HMA and the regular HMA can be used for potential trade entries or exits, depending on market conditions.
- Please also look at other moving average trading systems and the original Hull moving average.
- We have covered all stock market indicators.
What is the Zero Lag Hull Moving Average (HMA)?
The Zero Lag Hull Moving Average (HMA) is a modification of the Hull Moving Average, created by Alan Hull, to further reduce lag and maintain a smooth curve for better trend analysis. It is derived by doubly smoothing the price data using the Hull Moving Average technique by applying the calculation twice, albeit using different period lengths — the first time calculates the initial HMA from the price data and the second one uses initial HMA data to calculate a new HMA.
The Hull Moving Average technique involves getting a weighted moving average of the difference between two weighted moving averages of the price data.
While the regular Hull Moving Average is a lot smoother, more responsive, and has less lag than traditional moving averages, like the EMAs and SMAs, the double HMA smoothing method used in the Zero Lag Hull Moving Average helps to reduce the lag even further, creating a near zero-lag moving average indicator.
The Zero Lag HMA provides a smoother and more accurate representation of price trends by reducing lag and improving the responsiveness of the moving average line. When both the HMA and Zero Lag HMA are plotted, the latter, which is more responsive to price changes, will be the indicator line, while the former, which is less responsive, becomes the signal line.
This way, the indicator’s crossover of the signal line can be used as an entry or exit signal — in the right market situation.
Zero Lag Hull Moving Average (HMA) trading strategy – rules, settings, returns, and performance
A backtest is coming shortly.
How does the Zero Lag HMA differ from a traditional moving average?
The Zero Lag HMA differs from a traditional moving average in that it offers a smoother and more responsive moving average line with little or no lag than the traditional ones, such as the SMA or EMA.
It captures the changes in price trends more precisely by using a system of weighted moving averages, which places more weight on recent data, to get the HMA and then applies the HMA calculation again, this time on the HMA, to get the Zero Lag HMA. This way, it not only smooths the data but also nearly eliminates any lag present in the HMA.
Why is the Zero Lag HMA used in trading strategies?
The Zero Lag HMA is used in trading strategies because it provides a smoother and more accurate representation of price trends by reducing lag and improving the responsiveness of its moving average line. Given its quicker response to price changes, the Zero Lag HMA is often plotted with its precursor, the regular HMA, which then serves as a slower-responding signal line.
In that setup, the Zero Lag HMA line (indicator line) crossing over the regular HMA line (the signal line), can be used as an entry or exit signal if the market conditions are suitable. For instance, if the market is in an uptrend and the price makes a pullback to a support level and reverses, a buy signal is generated for a potential trend-continuation move when the indicator line crosses above the signal line.
How is the Zero Lag HMA calculated?
The Zero Lag HMA calculated is calculated using the HMA data. The formulas for the calculations are given as follows:
HMA = WMA{[2*WMA(Close, N/2) − WMA(Close, N)], sqrt(N)}
Zero Lag HMA = WMA{[2*WMA(HMA, n/2) − WMA(HMA, n)], sqrt(n)}
Where:
WMA = weighted moving average
Close = closing price
N = the period length for the HMA calculation
n = the period length for Zero Lag HMA calculation
To perform the calculation yourself, here are the steps to follow:
- Calculate an N/2-period WMA of the price close and multiply the value by 2
- Calculate an N-period WMA of price close
- Subtract the result of step 2 from that of step 1
- Use the result from step 3 to calculate a WMA with sqrt(N) to get the HMA
- Repeat steps 1-4 using the HMA data from step 4 and a different period (n) to get the Zero Lag HMA
- Plot both the HMA and the Zero Lag HMA data.
What makes the Zero Lag HMA a “zero lag” indicator?
What makes the Zero Lag HMA a “zero lag” indicator is the fact that it tries to de-lag an already de-lagged Hull Moving Average indicator using the same technique. It is a doubly de-lagged and smoothed indicator. While the lag may not be exactly zero, the double de-lagging process nearly eliminates the lag in the moving average.
The HMA de-lagging method involves using two weighted moving averages of different numbers of periods such that the longer-period MWA helps smooth out the noise in the price data, while the shorter-period WMA helps reduce the indicator’s delay by focusing on recent price action. The difference is then used as data for yet a shorter WMA that plots the indicator. This whole process is repeated to calculate the Zero Lag HMA.
Who developed the Zero Lag Hull Moving Average?
Alan Hull, an Australian stock market trader, developed the Hull Moving Average in 2005 in an attempt to solve the problem of lags in moving averages. Here is how he described it:
“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.”
The Zero Lag Hull Moving Average is a modification of the regular Hull Moving Average. It came about as a result of efforts of traders to further eliminate any lag left in the HMA. Different traders use different methods to achieve this, such as adjusting the weights of the WMAs used in the HMA or repeating the HMA calculation on the HMA data. The latter seems to be the more popular method.
How does the Zero Lag HMA reduce lag in trading signals?
The Zero Lag HMA reduces lag in trading signals by applying the HMA de-lagging and smoothing technique on the HMA data using a different set of period lengths. Thus, it uses a double de-lagging process to reduce the lag in trading signals.
The process involves using two weighted moving averages of different numbers of periods such that the longer-period MWA helps smooth out the noise in the price data, while the shorter-period WMA helps reduce the indicator’s delay by focusing on recent price action. The difference is then used as data for yet a shorter WMA that plots the indicator. This process is then repeated using the result of the first process as the data.
When should traders use the Zero Lag HMA?
Traders can use the Zero Lag HMA when they want to profit from a trending market. As a moving average indicator, the Zero Lag HMA works best in markets that trend for a long time in one direction. In such a market, traders can use the indicator to identify a new trend early and make a trade in that direction to profit over the duration of the trend.
So, traders can use the Zero Lag GMA as an entry and exit signal, especially when combined with the regular HMA as the signal line.
How does the Zero Lag HMA help identify trend direction?
The Zero Lag HMA helps identify trend direction by sloping in the direction of the trend. If the indicator is sloping upward, the trend is likely to the upside, and if it is sloping to the downside, the trend is bearish.
Another way to use the Zero Lag HMA to identify the trend direction is to plot it with the regular HMA, where the HMA acts as the signal line. When the Zero Lag HMA line crosses above the regular HMA line, the trend is bullish, and when the Zero Lag HMA line crosses below the regular HMA line, the trend is bearish.
Can the Zero Lag HMA be used for short-term trading?
Yes, the Zero Lag HMA can be used for short-term trading if applied on a timeframe that is for short-term trading. Such timeframes will include intraday timeframes for day trading, like the hourly, 30-minute, 15-minute, or 5-minute timeframe.
Swing trading may also be considered short-term trading, so the daily and 4-hourly timeframes are also good options. If a strategy based on the indicator is proven to offer an edge on any of these timeframes, then, the indicator can be used for short-term trading.
What are the main benefits of using the Zero Lag HMA?
The main benefits of using the Zero Lag HMA include:
- The indicator smooths the data, removing the random fluctuations in price action so that the trend can easily be seen
- It provides a fast response to sustained changes in price trends, which enables traders to respond faster in real time.
- It reduces lag by a lot (almost eliminates it), which helps traders avoid entering a trade late or missing it altogether.
- It provides a better representation of the ongoing market conditions so traders can understand what is going on.
How does the Zero Lag HMA respond to market volatility?
The Zero Lag HMA responds to market volatility by smoothing the price data to fit into the ongoing trend direction until the price action shows that the market has changed direction. It does this by using its smoothing mechanism to remove minor fluctuations in the price data. The indicator changes its direction only when the price changes have been sustained in the new direction.
How does the Zero Lag HMA compare to the regular Hull Moving Average?
Compared to the regular Hull Moving Average, the Zero Lag HMA is a doubly de-lagged and smoothed price data using the Hull Moving Average technique.
They use the same method — a weighted moving average of the difference between two weighted moving averages of different period lengths — however, the Zero Lag HMA applies the calculation twice, using the HMA gotten from the first calculation as the data and a different set of period lengths for the second calculation. This further reduces the lag in the Zero Lag HMA compared to the regular HMA.
What are the best settings for the Zero Lag HMA?
The best settings for the Zero Lag HMA will depend on your trading strategy, the market you are trading, and the results of your backtesting.
To trade with the Zero Lag HMA in any market, you must have a strategy and backtest it on the market. During your backtesting, you will have to experiment with different settings to find the ones that offer your strategy a trading edge in that market.
Can the Zero Lag HMA be combined with other indicators?
Yes, the Zero Lag HMA can be combined with other indicators to get the best out of it. A very simple one that often comes with the indicator itself is to plot it with the regular HMA as the signal line such that the a crossover of the signal line would be a trade signal.
But even with this, it will make more sense to combine the setup with a 200-period SMA, which will provide the long-term trend direction while the HMA crossover signals will provide the entry signal in the direction of that long-term trend.
How do traders use the Zero Lag HMA for entry and exit signals?
To use the Zero Lag HMA for entry and exit signals, traders may have to combine the indicator with other indicators or other forms of analysis to create their trading strategies.
For instance, they can use a trendline or a 200-period SMA to show the direction of the long-term trend and then use the Zero Lag HMA signal line crossover as an entry signal in the trend direction after a pullback to a support/resistance level. The opposite crossover will be the exit signal, as it indicates the beginning of a new pullback.
What are the limitations of the Zero Lag HMA?
The limitations of the Zero Lag HMA include:
- The indicator’s calculation is quite complex and may be difficult for beginners to understand
- In trying to eliminate lag, the indicator might compromise its moving average function, which is to smooth data
- It can be too sensitive and responsive to rapid and short-term price movements, which can lead to false signals
How does the Zero Lag HMA perform in trending markets?
The Zero Lag HMA performs well in trending markets, especially markets that trend sustainably in one direction for a long time. In such markets, the indicator will slope and move in the direction of the trend until the trend changes direction.
If the price move is sustained in the new direction, the indicator changes its slope to the new direction and moves along with the price.
Can the Zero Lag HMA be applied to different asset classes?
Yes, the Zero Lag HMA can be applied to different asset classes since it is calculated solely from the price data, which is often available for every asset class.
This is unlike a volume-based indicator, which cannot be applied in the currency market, as the spot forex market does not have a central exchange to document harmonized volume data.
What charting platforms support the Zero Lag HMA?
Almost every charting platform supports the Zero Lag HMA. The indicator is derived from the regular HMA, which is now available on most charting platforms, including TradingView, thinkorswim, TradeStation, MultiCharts, and so on.
If your trading platform does not have the Zero Lag HMA, you can easily get a programmer to create a custom version for your platform.
How do traders interpret signals from the Zero Lag HMA?
To interpret signals from the Zero Lag HMA, traders have to consider the slope of the indicator. To make it easier, they should plot it with the regular HMA line, which can serve as the signal line.
When the Zero Lag HMA line crosses above the HMA signal line and stays above it, the trend is bullish, and when it crosses below the signal line and stays below it, the trend is bearish.
Is the Zero Lag HMA suitable for beginner traders?
No, the Zero Lag HMA may not be suitable for beginner traders, as the indicator’s calculation is a bit complex.
However, it is the trading platform that calculates and plots the indicator. So, if a beginner trader can understand how the indicator works and be able to create a strategy with it, they can practice with it until they learn.
What timeframes work best with the Zero Lag HMA?
The timeframes that work best with the Zero Lag HMA will depend on your trading style and, ultimately, your backtesting results. If you are a day trader, you may want to trade on intraday timeframes like the hourly, 30-minute, or 15-minute timeframe.
If you’re a swing trader, the daily and 4-hourly timeframes may be more suitable. However, to know the best timeframe for whatever trading style you use, you have to backtest the various timeframes for that trading style to see the one that offers the best performance.
How does the Zero Lag HMA react during sideways markets?
How the Zero Lag HMA reacts during sideways markets will depend on its settings and the size of price swings in each direction. If the price swings are big enough in one direction, the indicator may slope in that direction and will slope in the other direction when the price swing in that direction becomes big enough too.
However, if the price swings in each direction are small (as in a tightly consolidating market) relative to the indicator’s settings, the indicator line may stay flat.
Can the Zero Lag HMA help avoid false signals?
Yes, the Zero Lag HMA can help avoid false signals if combined with other indicators or other forms of analysis to create a robust trading strategy.
However, you should know that it is not possible to totally eliminate false signals in trading, as the market condition can change at any moment.