The McGinley Dynamic indicator was created in the 1900s by John R. McGinley, a Chartered Market Technician, and since that time, it has been recognized as one the most reliable and valuable indicators for traders. Mr. McGinley wanted to create an indicator that could automatically adjust to market conditions, and as a result, McGinley appeared.
There are two popular trading strategies – Simple Moving Average (SMA) and Exponential Moving Average (EMA) strategy – but both of them have some limitations.
Simple Moving Average
A simple Moving Average, or SMA, calculates historical closing prices and divides them by the corresponding number of periods. For example, if you want to take an SMA for 10 days, you should sum up the closing prices for the 10 days and divide this amount by 10.
Also, if you would like to take an SMA for a longer period, for example, 50 days, you will see that it moves slower than for shorter periods. Correspondingly, with the smoother SMA, the reaction to the changes in prices is slower.
Note! In a high-volatility market, there can be challenging to assess the price action; respectively, false signals may appear. You should reveal these signals and avoid trading during them, as they could lead to losses.
Exponential Moving Average
Exponential Moving Average, or EMA, focuses on the current prices much more than on the historical ones. Due to this feature, EMA reacts to price changes faster than SMA, which is why EMA is a more effective tool for short-term trading.
However, Exponential Moving Average also has certain limitations. In particular, in the same way as with SMA, EMA prices can also get ahead of the market so that false trading signals may appear.
Note! Experienced traders prefer to use both SMA and EMA to get better results.
McGinley’s research on moving averages
In the research process, McGinley found out that moving averages are not perfect. First of all, traders often misapply them. The reason is that the trader should adjust the moving averages’ period to the market changes’ speed, but it may be difficult to implement. In particular, it is difficult to decide which timeframe for moving averages apply – for 10 days or 50 days. McGinley proposed to solve this issue with the implementation of an automatic adjustment of the length of the moving average that takes into account the speed of the market changes.
The second issue McGinley wanted to improve was that moving averages are often separated from the prices to a large extent. To be efficient, they should follow the prices, so they will be able to produce the right trading signals when the trader should open a position. For this purpose, McGinley intended to create an indicator that could follow the prices despite the different levels of market speed.
McGinley Dynamic indicator formula
As a result of his research, McGinley created the McGinley Dynamic, the indicator that helps to solve the problems mentioned above. The formula for the McGinley Dynamic is:
- MDi stands for the current McGinley Dynamic.
- MDi-1 is a previous McGinley Dynamic.
- Close means a closing price.
- k is a constant 60% of chosen period N.
- N is a period of the moving average.
Note! N is a constant that determines how closely the indicator tracks the index or asset. For example, if you emulate a 20-day moving average, use an N value half that of it (in this case, 10).
McGinley Dynamic indicator set up
After you log in to your account on the Binomo platform, find an icon with chart analysis. After that, choose McGinley Dynamic, which will be added to the chart. You can choose the needed period and source, as well as the color of the indicator’s line.
The McGinley Dynamic is similar to the moving averages but more accurate. It helps to reduce the separations from prices and adjusts automatically to the speed of the market changes.
How to use McGinley Dynamic indicator?
The McGinley Dynamic is an effective market tool and a helpful indicator for traders. It is more responsive to market changes than the SMA or the EMA, and its line moves faster in down markets and slower in rising ones. Also, the McGinley Dynamic (50) perfectly works as a dynamic support-resistance line. So, you can draw additional levels on the chart and get the entry points for trades.
You can use McGinley Dynamic on a real account. However, if you want to try it for the first time, it’s best to use a Binomo demo account and observe how this tool works in real market conditions without any risks. Bear in mind that online trading implies the risk of losing a deposit, so take it seriously and develop your knowledge of online trading strategies.