Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to continue the series on Technical Analysis and why it can be such an important asset for new or experienced traders. In this series I am covering some of the different Technical Analysis and Indicators which can be used to help determine market movement and sentiment when trading. For Part XXIV the focus will be on the McGinley Dynamic Indicator.
McGinley Dynamic Indicator
The McGinley Dynamic Indicator was created by John R. McGinley, a market technician, and is a type of moving average which was created to track the market better than traditional moving averages. It achieves this by adjusting for shifts in market speed. In general a moving average cannot react to the speed at which an assets price will react to events, due to a problem inherent in moving averages that use fixed time lengths, known as the lag. A market will move at different speeds, as it is not consistent and it frequently speeds up and slows down, and traditional moving averages fail to account for this market characteristic. The McGinley Dynamic indicator solves this problem by incorporating an automatic smoothing factor into its formula to adjust to market moves.
Calculating the McGinley Dynamic Indicator
To calculate the McGinley Dynamic Indicator a trader simply applies the relevant data in the formula. This includes current price, the number of periods being included, and the previous periods price.
The below image from phemex.com shows the McGinley Dynamic Indicator formula.
How to use the McGinley Dynamic Indicator
The McGinley Dynamic Indicator allows traders to monitor trends on a price chart and better decide when to buy and sell. The indicator allows a trader to make a more informed decision on when to open a long or short position, similar to any other moving average.
The McGinley Dynamic Indicator can be used as a support line, or resistance line, while also a trader a trader could wait until the price bounces off and the candlestick moves above the indicator line to buy and then placing their stop loss below the indicator line. Once the candlestick pattern changes from a bullish candle to a bearish candle, the trader should exit the position.
On the same not, if if the McGinley Dynamic indicator is in a resistance area, a trader may decide to open a short position when the price bounces off resistance and the candle moves below the indicator line, with a stop loss would be placed above the line.
Often traders combine the McGinley Dynamic indicator with volatility and volume indicators to confirm price trends. To get a stronger indication of a trend’s direction, often it is paired with an oscillator indicator, such as an RSI.
The below image from medium.com shows a McGinley Dynamic Indicator along with a Simple Moving Average, where you can note the difference in the speed and smoothness of the McGinley Dynamic Indicator at reacting to changes in the market trend.
Limitations of the McGinley Dynamic Indicator
While the indicator was designed as a smoothing mechanism, it should also not be the only technical indicator a trader refers to when making investment decisions. It is known to reduce the issue of lag compared to traditional moving averages, but it does not completely remove it. The indicator line is also known to move faster when the market is falling compared to when it is rising. Being aware of this means a trader can quickly sell when an asset enters a downward trend, while holding a position for as long as possible in a rising market. When there is no clear trend visible in an asset, it is more difficult to judge the McGinley Indicator as the asset is moving sideways. To make the most of the McGinley Dynamic Indicator a trader should also incorporate other types of technical analysis tools, such as RSI or MACD.
Conclusion on using the McGinley Dynamic Indicator for TA
As a trader, whether it be day trading or long term trading, using McGinley Dynamic Indicator can be very beneficial for monitoring trends and getting a better idea of when to buy and sell. It can be used to determine support and resistance lines, and in general is better at tracking the market than a traditional moving average. It is known to reduce the lag from a traditional moving average due to its triple smoothing, but it is still a lagging indicator. Therefore a trader should be aware that it is not recommended to use it as a standalone indicator and instead combine it with other forms of technical analysis.
As stated whether you are experienced or new, Technical Analysis can always be a useful asset when trading. Just remember it is not guaranteed and nobody can predict the future, no matter how certain you believe the patterns to be. It is always just another tool of the trade to help make more informed decisions when trading. A trader should always remember that the McGinley Dynamic Indicator is known to move faster when the market is falling compared to when it is rising and keep an eye out for this when using it as to not get caught into a false signal.
It is important to use the McGinley Dynamic Indicator along with other TA to get the correct signals for understanding the strength of a trend. When McGinley Dynamic Indicator a trader should always zoom out. Therefore if trading on a 5 minute chart check the 15 minute or even 1 hour chart to give you a better idea of the overall trend strength via the McGinley Dynamic Indicator.
You can find the previous parts to the series here:
Technical Analysis - Part I - Exponential Moving Average (EMA)
Technical Analysis - Part II - Relative Strength Index (RSI)
Technical Analysis - Part III - Bollinger Bands (BB)
Technical Analysis - Part IV - Moving Average Convergence Divergence (MACD)
Technical Analysis - Part V - On-Balance Volume (OBV)
Technical Analysis - Part VI - The Average Directional Index (ADX)
Technical Analysis - Part VII - The Aroon Indicator
Technical Analysis - Part VIII - The Accumulation/Distribution Indicator (A/D)
Technical Analysis - Part IX - The Supertrend Indicator
Technical Analysis Part X - Parabolic SAR Indicator
Technical Analysis Part XI - Support & Resistance Levels
Technical Analysis Part XII - Fibonacci Retracement Levels
Technical Analysis Part XIII - The Awesome Oscillator
Technical Analysis Part XIV - The Arnaud Legoux Moving Average
Technical Analysis Part XV - Ichimoku Cloud
Technical Analysis - Part XVI - Footprint Charts
Technical Analysis - Part XVII - Heikin Ashi Candlesticks
Technical Analysis - Part XVIII - True Strength Indicator
Technical Analysis - Part XIX - The Klinger Oscillator
Technical Analysis - Part XX - Connors RSI
Technical Analysis - Part XXI - Coppock Curves
Technical Analysis - Part XXII - Weighted Moving Average
Technical Analysis - Part XXIII - TRIX Indicator
Also feel free to check out:
I hope this post was beneficial and of some use, and I plan on continuing the series with the next instalment focusing on Williams Fractals. Of course each technical analysis provides different beneficial information, so combining your most trusted and favourite ones can be the best strategy for finding entry and exit points when trading.
Have a great day.
Peace. CryptoGod-1.
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