What it means
A standard moving average smooths past prices but has a well-known flaw. In a fast-moving market it lags far behind the price, and in a quiet or choppy market it is constantly crossed by the price, producing misleading signals.
The McGinley Dynamic tries to fix both problems at once. It does this by changing how quickly it moves according to how far the price has run away from the line.
When the price rises quickly above the line, the indicator speeds up to catch up, and when the price falls quickly below it, the indicator slows its adjustment to avoid being pulled around by short bursts. The result is a line that hugs the price more tightly than a regular moving average of the same length.
Traders use it in much the same way as other trend lines. A price staying above the line is read as an uptrend, a price staying below it as a downtrend, and a crossing as a potential change.
Because it stays closer to the price, it can also serve as a dynamic level of support or resistance. The calculation needs a starting value and a length setting called N, often set to around ten or more depending on the time frame.
A constant, usually 0.6, tones down the adjustment speed. The first value is commonly set equal to the price or to an ordinary moving average.
As with other technical tools, it does not predict the future. It describes what price has already done, and results depend heavily on the market, the setting and the discipline of the person using it.
Finance teams are more likely to meet it in market commentary than in internal reports.
In practice
Real-world examples.
Example
A currency trader plots the McGinley Dynamic on a daily chart of a major currency pair. The price stays above the line for several weeks, so she treats the trend as upward and holds her position. She exits only when the price closes below the line.
Example
A portfolio manager for a share fund reviews a chart of a large technology share. A standard 20-day moving average has produced three false signals in a month, while the McGinley Dynamic stayed clean. He adopts it as a screening tool for trend direction.
Example
A technical analyst at a brokerage writes a note on a commodity index. She shows that the McGinley Dynamic follows a sharp rally more closely than a moving average of equal length. The note helps clients see where a trend might be under pressure.
Formula
Calculation
McGinley Dynamic today = Previous value + (Price - Previous value) / (k x N x (Price / Previous value)^4)
Here k is a constant, usually 0.6, and N is the length setting.
Suppose the previous value is 100, today's price is 102, N is 10 and k is 0.6. The ratio of price to previous value is 102 / 100 = 1.02, and 1.02 raised to the fourth power is about 1.0824. The denominator is 0.6 x 10 x 1.0824 = 6.4946. The adjustment is (102 - 100) / 6.4946 = 2 / 6.4946, which is about 0.308, so today's value is about 100 + 0.308 = 100.31.Case study
Seen in the real world.
Northgate Trading Desk is an illustrative, fictional proprietary trading team that tested several trend lines on a basket of liquid shares. They compared a 10-day simple moving average with a McGinley Dynamic using N equal to 10 over a historical sample of two years.
The simple average generated 46 crossings of the price, many of which were quickly reversed. The McGinley Dynamic generated 31, and fewer of them were false starts.
The team concluded that the indicator reduced noise, though it did not make the strategy profitable by itself. In this illustrative test the desk treated the result as a useful improvement to its chart reading, not a trading system on its own.
Watch out
Common mistakes.
- Treating the McGinley Dynamic as a prediction tool, when it only describes recent price behaviour and can still give false signals.
- Changing the length setting after seeing the results, which tunes the indicator to the past and weakens its value going forward.
- Assuming it is the same as an exponential moving average, when its speed adjusts to the price while an exponential average uses a fixed weighting.
Questions
People also ask.
Who invented the McGinley Dynamic?
It was created by John R. McGinley, a market technician, and introduced in the 1990s as an improvement on moving averages.
What length setting should I use?
A common starting point is around ten to fourteen, but the best choice depends on the market and the time frame you trade.
Is it better than a normal moving average?
It often tracks price more closely and gives fewer false signals, but it is not guaranteed to be better in every market.
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