In this article, we will take a look at the McGinley Dynamic indicator and understand the features that make it superior to other moving average indicators. We will also discuss how McGinley Dynamic is calculated and how to use this data in trading.
What is the McGinley Dynamic indicator?
The moving average (MA) is an indicator that helps level price action by filtering out the noise from random price fluctuations. You can think of them as a line that shows you the average price of an asset over a specific period. MA is an excellent indicator to supplement technical analysis. An extraordinary yet less-known moving average indicator is called the McGinley Dynamic Indicator.
Designed by a market technician, John R. McGinley, this indicator is superior in tracking the market than most of the conventional moving average indicators. It improves moving average lines by correcting changes in market speed.
Understanding McGinley Dynamic indicator
The most common moving average indicators, including simple (SMA), weighted (LWMA), and exponential (EMA), depict the average security price over fixed time intervals. These indicators fail to shift according to the changes in the market speed, resulting in a lag that can affect their dependability.
The McGinley Dynamic indicator is an attempt to rectify this problem; it considers the pace at which the market shifts to allow a smoother and more reliable moving average. Market volatility often distorts the traditional moving averages from the actual price fluctuation, which may affect the analysis. The McGinley Dynamic indicator takes this into account, allowing you to choose the best strategy for trading.
McGinley Dynamic indicator formula
The McGinley Dynamic indicator formula was presented in the Journal of Technical Analysis in 1977. Due to the inclusion of an automatic adjustment factor in the formula, which speeds up/slows down the indicator in trending markets, The McGinley Dynamic indicator solves the problem of changing market speed. But the lagging effect between the moving average trend and the actual price is not eliminated; rather, the lag is minimized.
MD = McGinley Dynamic value of the preceding period
Price = Security’s current price
N = Number of periods
You can customize this formula to evaluate trends in different time frames, allowing you to monitor dynamic price patterns. You also can incorporate the McGinley Dynamic indicator formula into an Excel sheet to avoid recurrent calculations over different time frames. The indicator’s value can be updated by updating the value of “N”.
How to use McGinley Dynamic indicator?
We have seen the definition of the McGinley Dynamic indicator; now it’s time to understand how to use it to make better trading decisions. Like any other moving average trendline, this indicator can supplement the decision to opt for a short or long position over an asset. Because the McGinley Dynamic updates automatically over market speed changes, a sharp deviation from the trend pattern indicates its reversal.
Suppose the price pattern indicates the price to be in the range of support level. In that case, the trader typically waits for the price to rebound off the McGinley Dynamic moving average to execute a buy order. Consequently, a trader places a stop-loss order below the support level.
Contrarily, if the McGinley Dynamic trendline is at the resistance level, then it’s time to open a sell order. Observing trend directions in addition to resistance and support levels is crucial for a trader to take a position. Hence, incorporating different indicators and testing distinct strategies is essential for a trader to optimize technical analysis and confirm trend directions.
Stock screening using the McGinley Dynamic indicator serves as a great tool to search for securities with investment opportunities according to investors’ criteria. Trading platforms such as Zerodha provide an extensive range of technical indicators, including the McGinley Dynamic indicator, to improve the investment decisions of users.
Note! Some traders use technical stock screeners to see results for the best stocks to buy based on indicators, such as McGinley Dynamic Indicator.
The bottom line
The McGinley Dynamic indicator is a technical analysis tool that provides moving averages that are adjusted for market speed. This indicator is superior to the traditional moving averages, demonstrating a smoother and more responsive trend over price action.
You can learn more about the most popular technical indicators, like the McGinley Dynamic indicator, and trading strategies from special books that can be found on the Internet and downloaded in PDF format.