DEFINITION of McGinley Dynamic Indicator
McGinley Dynamic Indicator is a technical indicator that improves upon moving average lines by adjusting for shifts in market speed. The indicator attempts to solve a problem inherent in moving averages which use fixed time lengths - e.g., a 10- or 20-day moving average. The basic problem is that variable speeds of a market can throw off reliable signals of a moving average line. The McGinley Dynamic Indicator takes into account speed changes in a market (hence, "dynamic") to show a smoother moving average line. John R. McGinley, a market technician, is the inventor of the eponymous indicator.
BREAKING DOWN McGinley Dynamic Indicator
The speed of the market is not consistent; it frequently speeds up and slows down. Traditional moving averages such as a simple moving average or exponential moving average fail to account for this market characteristic. The McGinley Dynamic Indicator solves this problem by incorporating an automatic adjustment factor into its formula which speeds or slows the indicator in trending or trading markets. The indicator improves upon conventional moving average lines by minimizing price separations and volatile whipsaws so that price action is more accurately reflected in the line. The formula accelerates downward movements of prices in markets selling off and slows down upward movements in climbing markets. The underlying assumption is that investors are more prone to fear from losing money in the stock market and therefore are quicker to sell their shares when the market is dropping. Conversely, market speed on the way up is slower as investors more cautiously build their positions. Even though traders may use the line to make buying or selling decisions, McGinley's original intent for his indicator was for line smoothing instead of generating trading signals.