Like moving averages HMA is used to identify the trend direction. The direction of the HMA line shows the trend direction. When the HMA line is rising, trend is up and when the HMA line is falling trend is down. Also price trading above the HMA indicates uptrend and price trading below HMA line indicates down trend. Slope of the HMA line shows the strength of the trend.
HMA can be used to generate entry signals in trading strategies. First find the long term trend by the use of trend lines or any other trend identification method. A short term HMA is used for entry signals with this trend. In long term uptrend, when the short term HMA turns up, buy position can be opened. In long term down trend, when short term HMA turns down after a pullback, short position can be opened. The chart attached shows an example sell trade with trend line and HMA. After the trend line is drawn with major swing highs, wait for price to pull back, in the pull back HMA will rise. When the HMA turn down again open Sell position.
The HMA indicator has the following parameters.
1 HMA Period Period for HMA calculation
2 MA Shift – Shift if HMA is used as displaced moving average
3 MA Method Moving average Calculation Method for internal indicator formula. Values can be 0 – SMA, 1 – EMA, 2 – SMMA, 3 LWMA
4 MA Price – Price field used for HMA. Values can be 0 – Close, 1 – Open, 2 – High, 3 – Low 4 – Median, 5 – Typical 6 – weighted