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Understanding the MGD Indicator

The McGinley dynamic (MGD) is a technical analysis indicator created by John McGinley. The MGD works through the combination of SMAs and EMAs alongside a filter in order to smooth the line created by the data from the chart.

This indicator was created by McGinley as he believed that SMAs & EMAs did not accurately track the speed of the market. EMAs were too fast, while SMAs were too slow. Therefore through using both the SMA and EMA for the indicator, we get the MGD which when tracking has increased reliability, therefore reducing the likelihood of false signals.

NEO/USD MGD

Above we can see an example of the MGD indicator. The MGD indicator looks similar to an EMA or SMA line. When using the MGD, the indicator (like the SMA & EMA) can change time period. Below we can see an example of the 3 hour (blue) and 2 hour (red) MGDs for NEO/USD. Like MAs, as the period of time used for data is increased, the reactivity of the line decreases.

NEO/USD MGD – here we can see the increased reactivity of the indicator as the time period used for the data decreases

Support/Resistance

The MGD indicator can provide both support and resistance to a cryptocurrency, when a cryptocurrency is moving in either a bullish or bearish direction.

Support example

Below we can see an example of KSM/USD finding support with the 4 hour MGD on the 30 mins chart. This support is indicated with the red arrows.

KSM/USD

Resistance

On the contrary we can see the 4 hour MGD acting as resistance for KSM/USD on this 30 min chart. The resistance is marked with the first two red arrows.

After KSM broke above the MGD, KSM then went on a small run. The bullish sentiment was confirmed when KSM found support with the MGD, indicated with the final red arrow.

KSM/USD

MGD indicator conclusion

The MGD indicator is highly effective at seeing the current trends with cryptocurrencies and from research conducted for this article, provides support and resistance with increased effectiveness over the SMA and EMA.

Research for this article also found that as the time period for the MGD increased, so did the likelihood of the indicator providing substantial support or resistance. The indicator works with most alt coins within the top 100 market capitalization. However, to decrease. the likelihood of a false signal, these charts should be used alongside the BTC pair as well as the USD pair, if a potential position is to be taken.

As always the indicator should not be used solely by itself. The most appropriate indicators to be used alongside are the MACD & RSI.

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