McGinley Dynamic Indicator: Full Guide [2020]

Trend indicators

McGinley dynamic

The Mcginley Dynamic indicator is an indicator that is based on moving average line indicator with a soothing mechanism. Its soothing mechanism is so effective that it tracks prices far better than any other indicator. There is an inherent problem in all moving averages that they heavily rely on fixed time periods. The Mcginley Dynamic indicator looks to solve this inherent problem. As its name suggests, it always consider speed changes occurring in the market. It fulfils its purpose of creation in the best possible way by tracking the market far better than any other moving average indicator. 

  • The McGinley Dynamic indicator’s ambition is to replace classic moving averages and better track the market price.
  • It automatic adjusts its factor so it can follow the market speed and better fit the price.

How to calculate the indicator?

The Mcginley Dynamic indicator is so special because it quickly adjusts for changes in the speed of the market. It also immediately minimizes huges prices, price whipsaws, and price separation. It is all automatically done by it as a factor of its formula. The formula is

MD = MD1 + (PRICE – MD1) / (N * (PRICE / MD1) ^ 4)

Where:

  • MD1 represents the prior Dynamic indicator’s value
  • N represents Dynamic Tracking factor

Because of the calculations it has to make, Dynamic Line moves with pace in down markets just because it follows prices. On the other hand, in up markets, Dynamic Line moves with slow pace. Following the pace, traders prefer to sell in the down markets while prefer to delay the trade in the up markets. 

This tremendous indicator was invented by John Mcginley in 1997. He is a certified trading market technician. He has also remained editor of the Market Technicians Assn. Journal of Technical Analysis. Working with moving averages throughout in the 90s, Mcginley looked to invent a moving indicator that would be more responsive to values than any other existing indicator. That is what the Mcginley Dynamic indicator do with precision. 

The Mcginley Dynamic indicator vs Simple Moving Averages 

To further understand the Mcginley Dynamic indicator and its qualities, it is important to draw a comparison of it with Simple Moving Averages (SMAs). SMAs calculate past closing prices and divide by the total number of periods. In this way, SMAs smooth out price actions. For example, to calculate a twenty days moving averages, they add closing prices of the last twenty days and divide by twenty. They do so to predict the future prices by calculating moving averages. They gets slower to react with smoothing moving averages. Their calculations may not properly predict future prices because moving averages of 10 or twenty days period may face volatility of prices. SMAs may give false signals based on inaccurate predictions. This will create losses for traders. Exponential Moving Averages (EMAs) has also the very similar drawbacks they respond to moving prices much faster than SMAs. 

But the Mcginley Dynamic indicator is different and unique. Although it also tracks the moving averages in the trending market, yet it is more influential and reliable. The reason of its superiority is its consistency. It is more like a constant indicator that has the ability to maintain its consistency over both, short-term and long-term. The indicator focuses on forecasting trends and ignores short-term volatilities. It is the best and more reliable indicator for the long-terms. The rule is simple. The longer timeframe will yield the better forecast of a trend. Moreover, it has the ability to move with prices when markets gain momentum. On the contrary, SMAs and EMAs fail to keep up with the market pace and lag behind. 

What does the Mcginley Dynamic indicator tell traders?

Traders can analyze the information once the Mcginley Dynamic indicator is drawn on a trading chart. They can make use of the following signals:

Uptrend indication

When the price goes beyond the MD indicator line from below, it stays above the line and meanwhile the line also gradually ascends, it means the uptrend is present. 

Downtrend indication

When the price goes beyond the MD from above, it stays below, and meanwhile the indicator’s line gradually descends, it means downtrend is present. 

Trend Reversal indication

When price bars excessively begin to deviate from the indicator’s line, it is a warning of an upcoming trend reversal. 

How to use the Mcginley Dynamic indicator?

Many traders argue that there is no use of the Mcginley Dynamic indicator that does not give sell or buy signals. They usually discard it by labelling it not worthy of use for trading. But they are wrong. The Mcginley Dynamic enables you to see a wider picture of the movements in the market. It also does so in an accurate and timely manner because it doesn’t lag like the SMAs and EMAs. It is even more effective when in conjunction with other complementary tools such as volatility and vollume indicators. Although experts do not advise to use it in isolation, Mcginley Dynamic can still give signals at possible trend reversal points and entry points. 

What are the biggest mistakes to avoid? 

Traders should never use any one indicator because they cannot be absolutely sure about the market tendencies. Confirmation of a trend is always useful. Entry and exit are also tricky. Traders should always be careful about the false breaks. This is a more genuine concern when market is fast because false breaks can be a tendency of the Mcginley Dynamic indicator even on long-term charts. Therefore, it is the biggest mistake to use any indicator in isolation and it should be avoided to maximize gain.

What are the pros and cons of the Mcginley Dynamic indicator?

As we have discussed earlier that the Mcginley Dynamic indicator was designed to eliminate the inherent drawbacks associated with SMAs and EMAs. It has successful proved itself a reliable upgrade to all other indicators. It has several advantages such as:

  • Its soothing mechanism for prices proves more efficient in tracking prices than any other moving average indicator 
  • The Dynamic Line automatically tracks prices and stays aligned to prices by avoiding whipsaws
  • It is genuinely more responsive to market changes and does not lag behind like other indicators 
  • It is almost equally effective in both, long-term and short-term periods of trade
  • In order to solve the problem of choosing the time periods, it automatically tweaks to the market speed 

Just like the other indicators, it also has certain drawbacks that must be considered before choosing the Mcginley Dynamic indicator for your trading.

  • It was invented as a marketing tool rather than as a trading indicator 
  • Unfortunatly, it does not provide a complete picture on its own. It requires to work with other indicators to build a complete trading system 

Different versions of the Mcginley Dynamic indicator

The Mcginley Dynamic indicator is of two types:

  1. MD-Period: It requires Mcginley indicator period about 60% of the moving average’s period
  2. MD-Smoothing: It has the default value of 125 and it has the capability to adjust the sensitivity of the indicator’s line

Conclusion

The Mcginley Dynamic indicator has proved itself a fascinating market instrument since its invention in 1997. It was designed and invented with the aim to eliminate all the limitations of traditional SMAs and EMAs. The indicator strictly follows the trends of the market and is support and resistance based. It is more responsive and reactive to market changes than any other moving average indicator. However, it serves best, as advised by technical analysts and experts, when it works in conjunction with other indicators. The Mcginley Dynamic indicator is in fact a revolutionary development in the forex trading universe. 

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