Saturday, November 30, 2013

McGinley Dynamic

My latest experiment was on the Mcginley dynamic. The claim that it is one of the most reliable indicators attracted my attention.  The McGinley Dynamic technical  indicator aims to overcome the lag of the traditional simple and exponential moving averages, the indicator automatically adjusting itself relative to the speed of the market. The McGinley Dynamic looks like a moving average line yet it is supposed to be a smoothing mechanism for prices that turns out to track far better than any moving average. It is also supposed to minimizes price separation, price whipsaws and hugs prices much more closely. And it does this automatically as there is a factor of the formula. Because of the calculation, the Dynamic Line speeds up in down markets as it follows prices yet moves more slowly in up markets. One wants to be quick to sell in a down market, yet ride an up market as long as possible.
The Formula
MD = MD-1 + (Price – MD-1) / (N * (Price / MD-1 ) 4)
MD – McGinley Dynamic
N   -  Dynamic Tracking factor
Here the difference between the Dynamic and the price is divided by N times the ratio of the two to the 4th power. The numerator difference gives us a sign, up or down, and the denominator keeps us percentage-wise within bounds defined by N. The 4th power gives the calculation an adjustment factor which increases more sharply the greater the difference between the Dynamic and the current data. 
The McGinley Dynamic (MD) is supposed to avoid whipsaws because the Dynamic Line automatically follows prices in any market fast or slow, it is supposed be like a steering mechanism that stays aligned to prices when markets speed up or slows down.

Personally I do not find this indicator very useful. Maybe it is better as a tool to gauge the market instead of a regular indicator. Of course the MD performs better compared to the regular EMS in terms of closely tracking the stock and in terms of whipsaws. I am enclosing a chart with the MD (Yellow line) and to compare I have plotted a 20 EMA (Red Line).

For those interested to experiment I am enclosing the afl. Please let me know if you find any interesting aspect of the MD.