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Welcome to the next Stonehill Forex Indicator Study.  This research represents an investigative look into how and why some indicators work and some don’t work as well.

Increased Efficiency

We introduce indicators not included with the MT4 platform to find more efficient indicators which may yield superior results than older indicators better suited for different markets.

Our Next Indicator Choice is…

The McGinley Dynamic Indicator is our next baseline indicator choice.  This indicator has been recognized as one of the most underrated and unpopular indicators.  Ironically, it has also been acknowledged as one of the most reliable and functional as well, making it a great indicator for your trader’s toolbox.  

While the background math may seem complicated, it really is not.  A combination of moving averages, with a unique ability to speed up in bear markets and slow down in bull markets, help the trader identify better points to enter and exit the market.

History

The indicator was developed in 1997 by John R. McGinley, a former editor of the Market Technicians Association’s Journal of Technical Analysis and a Certified Market Technician.  His effort was in response to designing a responsive indicator capable of adjusting itself to the market’s speed, and was first published in the Journal of Technical Analysis in 1997.
Baseline Indicator

The McGinley Dynamic Indicator presents as an on-chart indicator, overlaying price (See snapshot below).  We consider it a “baseline indicator”.  A baseline indicator falls into the category of indicators whereby it serves as an initial gatekeeper when setting up your algorithm.  These concepts are explained in great detail in the Stonehill Forex Advanced Course.

Advantages

* Clear signals without confusion

* Smooths out market noise

* Better representation of market dynamics due to adaptive nature

* Reduced lag as market conditions change

A Thing of Beauty

Below is a screenshot of what the indicator looks like on the daily time frame.  Note that we’ve changed the color of the candles to white to remove any emotional bias and that only the indicator is prominent.  We’ve adjusted the colors of the indicator to make it more visible on the chart. 

How We Use It

The signal occurs on the opening of the period following the change of color from green to red, or red to green.  Let’s review the highlighted marks on the picture below to understand what they mean.

Signals

* Long = Line turns from red to green.

* Short = Line turns from green to red.

Settings

The settings include; average period, price to use, constant, average mode.  The default settings are; 12, close price, 5.0, and exponential moving average.  These are the settings and default values of the version we have available for download on the resource page.  Some versions have slightly different default values.  Before we take a closer look, I’ll explain what each parameter represents.

Average Period:  The number of periods to calculate the moving average line.

Price to Use:  Close, Open, High, Low, Median, Typical, Weighted – which specific set of price points the indicator uses to calculate the resultant data and subsequent appearance of the indicator.

Constant:  Defines the relationship between both Average Period and Price to Use. You can customize how the indicator is calculated with respect to the speed it reacts to both bull and bear markets.

Average Mode:  Simple, Exponential, Smooth, Linear Weighted – the manner in how data is calculated from price.

Testing…Testing…Testing

Remember, comprehensive analysis is strongly suggested, and we advocate backwards and forward testing indicators or systems prior to trading actual funds.  We propose conducting your tests on the following five pairs.

EUR/USD

AUD/NZD

EUR/GBP

AUD/CAD

CHF/JPY

If it doesn’t work on these five pairs, chances are it won’t work on other pairs. This is not an absolute, but we’ve found this rule is reliable in most cases.

Timeframes and Results

In our initial test, we’ll run the McGinley Dynamic Indicator on the EUR/USD using the default settings across the daily and 4-hour timeframes on the MT4 strategy tester.  We use the fast method of testing the indicator to get a general idea; however, you may also run the tick-by-tick data set for a more precise result (which takes considerably more time).

As No Nonsense Traders – and therefore Swing Traders, we will not examine shorter time frames in these studies.  We will run multiple iterations using combinations of the settings to analyze which one works best and examine their results:

1. Total trades

2. Win/Loss ratio

3. ROI (return on investment)

There are other metrics included in the strategy tester report, which can be compared, but these three metrics provide the necessary gauge to make quick decisions as to the usefulness of a particular indicator and its settings.

Next, for comparison, we’ll explore the following;

Daily – 1 year

4-hour – 3 months

The reason exceptionally long (or short) testing periods are not included is due to changing market conditions, which might return irrelevant information.  A balance of statistically significant data is necessary for accurate results.

And the Outcome…

Below is a spreadsheet listing the results from our tests.

You can see that the green highlighted rows represent the best settings for that time frame when all the indicator settings have been taken into consideration.  Keep in mind that this changes over time and should not be considered specific trading advice.

***Note:  Never use just this one indicator as your decision of whether to open or close a trade.  It should be part of a system.  

Money Management

If you are curious as to what money management is used on our tests; we have a certain way of determining wins and losses, which can be found in the Advanced Course.  Our goal here is to determine how well the indicator reacts to price with respect to producing a long or short signal.  Your system, with its risk profile, will dictate individual returns.

Resources

As we did with past indicator studies, we’ve made the McGinley Dynamic Indicator available for download on our site from the indicator library.  We will keep adding better indicators with each study for your use, at no charge.  When you’re ready to get it, click HERE.

For more detail about this indicator, check out the article at the Investopedia site; McGinley Dynamic Indicator

More to Come

There’s a lot more to come.  We are excited to provide more trading tips in the near future.  Sign up on our contacts page or subscribe to our YouTube channel.  Receive  early notifications as we continue to publish helpful, relevant, and informative Forex related material to support your quest to become  a better trader.

And, now you are aware of another indicator that many traders don’t know or use.

Our only goal is to make you a better trader.

 

BTW – Any information communicated by Stonehill Forex Limited is solely for educational purposes. The information contained within the courses and on the website neither constitutes investment advice nor a general recommendation on investments.  It is not intended to be and should not be interpreted as investment advice or a general recommendation on investment. Any person who places trades, orders or makes other types of trades and investments etc. is responsible for their own investment decisions and does so at their own risk. It is recommended that any person taking investment decisions consults with an independent financial advisor. Stonehill Forex Limited training courses and blogs are for educational purposes only, not a financial advisory service, and does not give financial advice or make general recommendations on investment.