The Hull Butterfly Oscillator (HBO) is an oscillator constructed from the difference between a regular Hull Moving Average ( HMA ) and another with coefficients flipped horizontally.
Levels are obtained from cumulative means of the absolute value of the oscillator. These are used to return dots indicating potential reversal points.
The oscillator can be used like most available oscillators. The sign of the HBO allows determining the current trend direction, while divergences with price might indicate potential reversals.
The displayed levels can additionally indicate whether the market is overbought or oversold. When the direction of the oscillator changes while being above the upper or lower level a red dot (if above upper level) or green dot (if under lower level) will be displayed, indicating a potential reversal.
The name of the indicator is directly derived behind the coefficients used for its calculation. Displaying regular Hull coefficients alongside those flipped horizontally slightly resemble a butterfly , the difference between these sets of coefficients allows obtaining the HBO.
This operation allows to obtain a more structured impulse response, potentially giving less undesired performances on the frequency domain compared to simpler operation involving subtracting the HMA to a SMA , EMA or WMA .