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Welcome to the first indicator study.  This research represents an investigative look into how and why some indicators work and some don’t work as well.

New Versus Old

The theory behind these studies is to explore more efficient indicators, which may yield superior results than older indicators that were suited for different markets of a bygone era.  Sadly, many traders defer to pre-packaged indicators and/or systems, which use combinations that just can’t compare with more modern trading tools developed in this century.  Granted, there are exceptions, but they are few and far between.

Our first choice is…

We’ve chosen the Hull Moving Average, or HMA as our first choice.  There are a few variations available, but we’ll stick with an original version.  Moving averages are generally one of the first indicators a novice trader learns and uses, and usually finds itself as part of a trader’s toolbox.

Baseline Indicator

Developed by Alan Hull in 2005, it presents as an on-chart indicator, overlaying price (See snapshot below).  We consider it a “baseline indicator”.  A “baseline indicator” falls into the category of indicators whereby it serves as a type of signal gatekeeper when setting up your algorithm.  These concepts are explained in great detail in the Stonehill Forex Advanced Course, HERE.

Advantages

Similar in appearance to most types of moving averages, the HMA has advanced math, which attempts to provide advantages, including;

  • Reducing lag
  • Increasing responsiveness
  • Eliminating market “noise”
  • Emphasizes more recent market prices
  • Aids in identifying prevailing market trends

Settings

The setting includes; period, shift, method, and price.  The default settings are 13 periods, zero shift, simple method and typical price.  Before we take a closer look, I’ll explain what each parameter represents.

Period:  The number of period to calculate the moving average line.

Shift:  The ability to have all its values shifted forward (positive displacement) or back (negative displacement) in time.  (We’ll be ignoring this setting as the only real use it has is to align it with highs and lows.  This does not help us find the best settings.)

Method:  Simple, Exponential, Smooth, Linear Weighted – the manner in how data is calculated from price.

Price:  Close, Open, High, Low, Median, Typical, Weighted – which specific set of price points the indicator uses to calculate the resultant data and subsequent appearance of the indicator.

Screenshot

Below is a screenshot of what the indicator looks like on the daily time frame.  Note that we’ve changed the color of the candles to gray and the indicator to remove any emotional bias so that only the indicator is prominent.  We’ve also changed the color of the indicator itself, so it stands out against price.

 

How we Use it

Generally speaking, traders use moving average indicators when price crosses and closes above or below the moving average line.  There are some traders who take signals when price crosses above or below; however, do not wait for the candle to close.  This practice is not advised as an open candle’s price action can change drastically.

Testing…Testing…Testing

While we strongly advocate backwards and forward testing indicators or systems prior to trading actual funds, the task of manually sorting signals through more than 70-130 available currency pairs is daunting at best.  That being said, we suggest conducting your tests on the following five pairs.

EUR/USD

AUD/NZD

EUR/GBP

AUD/CAD

CHF/JPY

You may ask, “Why these pairs?”  The reason is simple and straightforward.  You’ll notice that these pairs contain all eight of the major currencies; coincidently the only ones we suggest trading, and if you cannot obtain reasonable returns with a specific indicator and its settings on these pairs, then it most likely won’t work on any combination of currency pairs.  Granted, this is not an absolute, but we’ve found that this rule is pretty reliable in most cases.

Timeframes and Results

In our initial test, we’ll run the HMA on the EURUSD using the default settings of 13 periods, 0 shift, simple method, and closed price across the daily and 4-hour timeframes on the MT4 strategy tester.  We’re using the fast method of testing the indicator to get a general idea; however, you may also run the tick-by-tick data set for a more precise result (which takes considerably more time).  As No Nonsense Traders – and therefore swing traders, we won’t be examining shorter time frames in these studies.  Then we’ll run multiple iterations using combinations of the three settings (we’re excluding the shift function) to see which ones work best and examine the results:

1. Total trades

2. Win/Loss ratio

3. ROI (return on investment)

There are many other metrics included in the strategy tester report, which can be compared, but these three metrics provide the necessary gauge to make quick decisions as to the usefulness of a particular indicator and its settings.

For comparison, we’ll explore the following;

Daily – 1 year

4-hour – 3 months

The reason we don’t include exceptionally long (or short) testing periods is due to changing market conditions, which might return irrelevant information.  A balance of statistically significant data is necessary for accurate results.

And the Outcome…

Below is a spreadsheet listing the results from our tests.

 

 

You can see that the green highlighted rows represent the best settings for that time frame when all the indicator settings have been taken into consideration.  Please keep in mind that this changes over time and should not be considered specific trading advice.

Money Management

For those who are curious as to what money management we’re using on our tests; we’re only using a stop loss of 1.5 x ATR and take profit of 1 x ATR.  We’re only determining how well the indicator reacts to price with respect to generating a long or short signal.  Your system, with its risk profile, will dictate individual returns.  The stop loss and take profit levels are based on the No Nonsense Forex methodology, which can be found in the Advanced Course by clicking HERE.

Resources

Now that we’ve demonstrated some benefits of this indicator, you may wonder where it can be found.  A simple Internet search will yield useful results.  Or, you can download it from the indicator library on this site HERE!

More to Come

There’s a lot more to come.  If you haven’t signed up on our contacts page or subscribed to the YouTube channel, please consider doing so to receive notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to becoming a better trader.

And, now you are aware of an indicator that many traders don’t know or use.

Our only goal is to make you a better trader.

 

BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments.  It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.