How to use Mcginley Dynamic Indicator
Have you heard of McGinley Dynamic? This name may be unfamiliar to you as a novice trader, but please know that this is one indicator that traders can use to get trading signals.
If you look at the appearance of this indicator at a glance, there are similarities to the Moving average. But this indicator is more as responsive as a moving average.
This indicator can be an additional toolbox of indicators that are already available on the MT4 platform. Unfortunately, to use this indicator you cannot find it in the list in default indicators. The only way is to download it on the internet and then install it on your MT4.
Well in this article we will discuss this McGinley dynamic indicator, here’s how to use it. Keep reading.
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What is McGinley’s dynamic indicator?
Moving averages are considered less than optimal in providing accurate signals, so John R. McGinley, a market technician, created the McGinley dynamic indicator, he is also the inventor of the eponymous indicator.
McGinley’s dynamic indicator will increase on the moving average line to be able to adjust for shifting market speed. The key points in McGinley’s dynamic indicator are:
- McGinley Dynamic Indicator is the development of a moving average indicator to track the market better than other moving average indicators.
- The McGinley Dynamic Indicator solves the problem of varying market speeds by incorporating an automatic adjustment factor. Into its formula that speeds up, or slows down, an indicator in a trend, or range, market.
- This indicator tries to improve on conventional moving averages by minimizing price splits and volatile gimmicks so that price action is more accurate.
McGinley dynamic indicator goal
McGinley Dynamic Indicator attempts to solve problems that arise with moving averages that use fixed lengths of time. The basic problem is that the market, as a large trading mechanism, reacts at a speed that the moving average will not be able to handle.
This problem is called lagging, and no type of moving average, whether it is a simple, exponential, or weighted moving average, is unaffected by this. Understandably, this will put into question the reliability of the moving average. The McGinley Dynamic Indicator takes into account the changing speed of change in the market to show a smoother, more responsive line of a moving average.
Market speeds that are not always the same often speed up and slow down. Moving averages, whether simple moving averages or exponential moving averages, often fail to take into account the characteristics of a dynamic moving market like this.
So the idea emerged to create a McGinley Dynamic Indicator to solve this problem by incorporating an automatic smoothing factor into the formula to adapt to market movements. Thus speeding up, or slowing down, the indicator in a trend, or range, market.
But that doesn’t mean this will completely eradicate the lagging problem, it’s just that the reaction to market movements is faster. An important point of concern because of its smoothness constant, it will be more responsive to the market than other moving averages. To adjust this indicator the trader can select the number on the period (N)
McGinley dynamic formula
McGinley dynamic indicator calculations follow the formula as below:
If you look at the appearance of the McGinley indicator, it is similar to the moving average indicator, but it is claimed to provide a better signal, with more responsive alignment.
The chart image above is the McGinley dynamic indicator which is marked in yellow, and the line is thicker, while the moving average is blue with a thinner line. You can distinguish how the indicator line reacts to this dynamic price behavior, and the McGinley indicator provides a smoother line thus reducing false signals that appear.
The McGinley dynamic indicator serves to increase conventional moving averages by minimizing price splitting and volatile false signals so that price action is more accurate. This calculation method allows the indicator to accelerate, or slow down, in the McGinley Dynamic indicator based solely on the price movement of the security. That is why this indicator is called dynamic.
Although traders can use the lines to make buying, or selling decisions, McGinley’s original intention for his indicator was to reduce the gap between the indicator and the market. The logic is that the moving average tracks faster the more false signals will appear in generating trading signals.
How to install McGinley Dynamic in MT4?
To install the McGinley dynamic indicator you have to download the file first because by default this indicator is not available on the MT4 platform. You can download the zip file then extract the indicator file then copy and paste it into the indicators folder on your platform.
You can try to download the file below:
Or from the source here
I’m sure you already know how to install indicators on your MT4 platform. But if you forget then I remind you the steps are as follows:
- Run your MT4 platform. From the top menu select File – >> Open Data Folder.
- Select MQL4 folder
- Select the Indicator folder then paste the .mql4 McGinley dynamic indicator that you extract before.
- Now your indicator already on the right folder, then to the appearance indicator on your platform, you can exit or close your platform then start again. Or the simple and straightforward way just go to the navigator window on the platform the right-click and select refresh.
- Now you should already see an indicator on the list.
- Then how to attached indicator on the platform just simply double click indicator name and will appear new window to set up your indicator.
- You can change the default parameters with custom settings that you like, for the period used, smoothing, and other settings. When finished then click OK, then the indicator will appear on your MT4 platform.
How does it work?
The way the McGinley dynamic indicator works is to solve problems that often appear in moving average indicators. This indicator was developed by John McGinley in which he saw how market activity accelerated and slowed down in the same period. Moving averages use a fixed length of time.
So this indicator assumes that each particular market operates at a consistent speed over time with the same selection period. For example, SMA10 continues to provide a 10-day average grade for all eternity. Without adjusting the length of time based on the rate of acceleration or deceleration that often occurs in the market, the 10-day interval is considered by McGinley to be wrong.
It may be possible to solve this problem by testing different intervals at different times, which is time-consuming and imprecise. However, this will have its own difficulties because in a one-time interval the price moves dynamically.
McGinley’s dynamic indicator tries to solve this problem, working automatically to adjust to a certain market speed. Hopefully, this way will reduce the likelihood of whipsaws and major price action deviations from the trendline.
The formula uses different values from the index along with a large exponential factor. The aim is to emphasize the effects of volatility, creating adjustments that vary logarithmically, not linearly.
From this formula, the McGinley dynamic indicator acts as a moving average that accelerates when the index accelerates and slows down when it slows down. The lines generated by the McGinley dynamic indicator tend to approach price action more closely and produce data smoothing more effectively than simple or exponential moving averages (SMA or EMA).
According to McGinley moving averages have very limited use as trading signal generators.
How to use McGinley Dynamic indicator?
Although the McGinley dynamic indicator is a refinement of the moving average, in practice many practitioners recommend using other indicators in determining trading signals. Other indicators that can be used are for example the RSI, or the MACD, De marker, and so on.
But if you want to use this indicator yourself, following these few rules can practice your skills. Evaluate the results and try to improve for better results. But if you pay attention, this indicator also has flaws. This means that not always the signal is given will be 100% accurate without mistake. As with other indicators, you can evaluate to correct the mistakes.
McGinley dynamic buy rules
If you use the dynamic McGinley indicator alone, you can try the buy rules to make the following rule:
- Suppose the McGinley dynamic indicator is a support zone.
- Buy rule by waiting for the price to bounce off when the candlestick is above the McGinley indicator line.
- If the price reaches the indicator line, wait for the close candle to form a bull’s candle to buy.
- You can place a stop loss under the McGinley indicator line.
The example image above the blue circle is an area to buy when there is a bounce in price approaching McGinley’s line. With the stop loss below the indicator line. Then what about the profit target? If you can focus on the chart screen, you can adjust the exit time according to changes in the candlestick pattern, if after one perfect bullish candlestick is followed by a bearish candlestick pattern, it will be safer to exit at that time.
However, you can also define targets by taking the moving averages for that time frame.
McGinley dynamic Sell rules
Sell rules are actually just the opposite of Buy rules, this will be easy to understand, with a similar step only with reverse rules.
- Suppose the McGinley dynamic indicator is a resistance zone.
- Sell rule by waiting for the price to bounce off when the candlestick is below the McGinley indicator line.
- If the price reaches the indicator line, wait for the close candle to form a bears candle to open sell.
- You can place a stop loss above the McGinley indicator line.
The picture above is the EURUSD pair on the H4 timeframe, which in my opinion is suitable for applying the McGinley dynamic indicator. Maybe you need to do trial and error to get the best signal from this indicator.
McGinley dynamic with RSI
Sometimes traders are not satisfied with only relying on one indicator. Likewise, to use the McGinley dynamic indicator, we can combine it with the additional RSI indicator. RSI is an oscillator indicator but can also determine the direction of the trend using the 50 levels as the middle line.
Buy setup McGinley dynamic with RSI
- Open buy if the price crosses the McGinley indicator line from below.
- RSI is above level 50 which means that the price is on the uptrend.
- Place a stop loss at a swing low or below the McGinley dynamic indicator line.
- You can determine the profit target by taking the average movement or manually closing it when a candlestick changes.
Sell setup McGinley Dynamic with RSI
The sell rule is the same, only the opposite of the buy rule, you can easily understand it:
- Open sell if the price crosses the McGinley indicator line from top to bottom.
- Make sure RSI is below level 50 which means that the price in a downtrend.
- Place a stop loss at a swing high or above the McGinley dynamic indicator line.
- You can determine the profit target by taking the average movement or manually closing it when a candlestick changes.
All of the examples of trading setups above are just educating you to learn the McGinley dynamic indicator. But this is not investment advice. Forex and CFD are risky instruments, and each trader deals at his own risk.
McGinley Dynamic VS Moving average
The problem that often arises with a moving average is its lagging character, therefore this is called a lagging indicator. This means that it is often too late to give a signal when a new trend has formed.
Meanwhile, the McGinley dynamic indicator only tries to improve the weaknesses of the moving average. So that the signaling will be more responsive.
Maybe by looking at the picture below you will be able to draw your own conclusions about how the two indicators signaling differs.
If you pay attention to the image above. You can see that the McGinley indicator line is more responsive to price behavior. While the MA is later to price behavior. And also how the reaction of the McGinley line as dynamic support and the resistance line is more accurate than the MA.
From this point of view, the advantages of this indicator can be an alternative to the MA to get better signaling as a reference in determining a new position.
Is McGinley Indicator a good signal?
If we assess the accuracy of this McGinley dynamic indicator, what we can see from the history of this indicator’s data on the H4 timeframe seems to provide a better picture of signaling compared to H1. This is my own opinion because some other traders actually prefer and match the H1 timeframe.
This will also depend on your experience using this indicator later. With a long experience will find new things to improvise on better results. However, there is no perfect indicator, there are all drawbacks, as well as this McGinley indicator which is difficult to use, especially on sideways.
McGinley’s dynamic indicator is a new variant as an improvement to the moving average. This will add to your toolbox as a tool in analyzing forex. In practice, the success or failure of this indicator is very important by keeping the trade by adjusting the position size to your total capital.
The money management rule is more important than an indicator. Because no matter how good the indicators are without strong money management, there will be more failure than success.
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