What Is The McGinley Dynamic Indicator & How To Trade With It

McGinley Dynamic Indicator

The McGinley dynamic indicator was developed by J. McGinley in the year 1990 and is used as a moving average. The indicator can be used to help filter trading signals as part of an overall forex trading strategy. It can also be applied to other markets including stocks, commodities, indices, cryptocurrencies and more.

What is the McGinley Dynamic Indicator?

Volume and volatility components with the addition of the McGinley Dynamic Indicator to help mitigate the negative effects of accelerating or slowing markets. His formula is specifically aimed at capturing the effect of changes in market characteristics on the trend line.

John McGinley was not going to use his tool as an indicator. He believed that moving averages are error-prone and unable to generate reliable trading signals. His formula was to eliminate the inability of the moving average indicator to adapt to the pace of trade, but only as a trend-oriented tool.

However, you cannot completely replace this indicator in place of the moving average. Moving averages, especially simple moving averages (SMAs), are often used by forex traders to help identify discrepancies and crossovers to help place exit and entry positions. The dynamic McGinley indicator refers to reducing the lag and the accusation of the price action of the currency pair, deliberately ignoring the discrepancies in an attempt to eliminate whipsaws and false signals.

McGinley Dynamic Indicator on chart
McGinley Dynamic Indicator on chart

General characteristics of the McGinley Dynamic Indicator

  • Currency pairs: All, including major and minor forex currency pairs.
  • Trading platform: This is a custom indicator based on the Mcginley Dynamic Indicator developed for the Metatrader 4 platform.
  • Indicator type: It is a trend indicator based on moving averages.
  • Recommended time frames: 1 minute, 5 minutes, 15 minutes, 30 minutes, 1 hour, 4 hours, one day, one week, one month.
  • Indicator customization options: Variables (# of periods, smoothing) colors, width, and style.
McGinley Dynamic Indicator settings
McGinley Dynamic Indicator settings

How to use McGinley Dynamic Indicator?

Traders can combine the McGinley Dynamic Indicator with other indicators designed to generate exit and entry signals, such as moving average convergence divergence (MACD) or relative strength index (RSI). Whenever there is an opportunity for profit or a possible change in trend, rely on the McGinley Dynamic Indicator to confirm or reject it.

Forex traders can use the McGinley dynamic indicator in the same way as using the moving average indicator – to identify trends and confirm the signals of other technical tools. The McGinley dynamic indicator is designed to remove the subjective application and the static flaws of simple and exponential moving averages (EMAs).

The Mcginley Dynamic Forex indicator for the Metatrader 4 platform is an indicator based on moving averages that have a smoothing factor in reducing false signals.

Their trading signals are very simple:

  • If price action is on the Mcginley indicator: we can look for possible buy signals.
  • If price action is below the Mcginley indicator: we can look for possible sell signals.

The indicator settings (period, smoothing factor) can be changed directly from the indicator settings tab.

McGinley Dynamic Indicator trade signals
McGinley Dynamic Indicator trade signals

McGinley Dynamic Indicator trading strategy

We are presenting a trading strategy based on McGinley Dynamic Indicator and the confirmation signal is taken from the RSI.

McGinley Dynamic Indicator buy strategy

  • The price should cross above the McGinley Dynamic Indicator (period 20).
  • The RSI line should be above the 50.0 level.
  • We could place the stop-loss around the swing low.
  • We could exit the trade in profit when the price moves 50 pips above the entry price.
McGinley Dynamic Indicator buy setup
McGinley Dynamic Indicator buy setup

McGinley Dynamic Indicator sell strategy

  • The price should cross below the McGinley Dynamic Indicator (period 20).
  • The RSI line should be below the 50.0 level.
  • We could place the stop-loss around the swing high.
  • We could place exit the trade in profit when the price moves 50 pips below the entry price.
McGinley Dynamic Indicator sell setup
McGinley Dynamic Indicator sell setup

McGinley Dynamic Indicator conclusion

The McGinley Dynamic indicator can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.

I would prefer to use the majority of technical indicators such as the McGinley Dynamic indicator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The McGinley Dynamic indicator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the McGinley Dynamic indicator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the McGinley Dynamic indicator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!