The McGinley Dynamic indicator was invented in the 1990s by John R. McGinley. He is a Chartered Market Technician. He was working on an indicator that would adjust automatically to the changing market conditions. The result of his research is the McGinley Dynamic indicator.
Simple Moving Average
The SMA calculates past closing prices and then divides them by the number of periods used for calculations. If, for example, we take a 10-day SMA, we have to add the closing prices from the last 10 days and then divide by 10. If we take a 50-day SMA, it will move slower than a 10-day one. And the smoother it is, the slower reaction to the price changes. In times of high volatility, it can be difficult to evaluate the price action and some false signals may take place. This could lead to a loss that we would rather wish to avoid.
Exponential Moving Average
The EMA pays more attention to the present prices than to the older ones. Thus, it reacts to prices much faster than the SMA. It is of great help in short-term trading. Traders are commonly using both, the SMA and the EMA to get the best entry and exit points. However, the EMA is not perfect. Here, similarly to the SMA, the prices may get ahead of the market.
What is the McGinley dynamic indicator?
McGinley found the moving averages imperfect. The first problem was that they were too often applied incorrectly. The period of the moving averages should be adjusted to the speed of the market changes. But it is very difficult to decide whether to use a 10-day or 50-day moving average at that particular moment. McGinley wanted to solve this problem by introducing an automatic adjustment of the length of the moving averages according to the speed of the market.
Another problem McGinley saw in the moving averages was that they are often too far separated from the prices. They should follow the price to give the right signals to open a position, but they fail frequently. Thus, he wanted to create an indicator that would follow the prices closely, no matter the speed of the market, and thus it would avoid whipsaws.
During his research, McGinley invented the McGinley Dynamic that was solving the above problems. The formula for calculating his indicator is as follows:
- MDi stands for the current McGinley Dynamic
- MDi-1 is a previous McGinley Dynamic
- Close means a closing price
- N is a period of the moving average
- k is a constant 60% of chosen period N
Setting up the McGinley Dynamic on IQ Option
Open your account on the IQ Option platform and search for the chart analysis icon. Introduce ‘mc’ in a search window. Then click on McGinley Dynamic and it will be added to your chart.
Now you can change the period, source (which price O, H, L or C is used for calculations), and the colour and thickness of the indicator’s line.
The McGinley Dynamic has the appearance of a moving average, but it is much better than the latter. It reduces the separations from the price to the minimum so it avoids whipsaws. Moreover, it happens automatically thanks to the calculations applied.
|Comparison between McGinley Dynamic, SMA, and EMA
|Automatically adjusts to market conditions, reducing separations from price, avoiding whipsaws, and providing dynamic support or resistance.
|Simple Moving Average (SMA)
|Calculates the average of past closing prices over a specified period, slower to react to price changes, and may produce false signals during high volatility.
|Exponential Moving Average (EMA)
|More weight is given to recent prices, reacts faster to price changes than SMA, but can still lag behind the market, especially during high volatility.
How to use McGinley Dynamic indicator
The McGinley Dynamic was created to work as a market tool, but it is also great as an indicator. It is more responsive than the SMA or the EMA. Its line moves very fast in down markets and a little bit slower in up markets.
Go straight ahead to your IQ Option demo account and check the McGinley Dynamic indicator. This is a risk-free option to try all new tools on the platform. Once you get familiar with the indicator you can move your new skills to the real account. Don’t forget to share your thoughts in the comments below.
Best of luck!
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