FOREX FOCUS

# The McGinley Dynamic

by Brian Twomey

Apply this market tool devised by a master technician to analyze the forex markets.

The McGinley dynamic is a market tool invented by veteran trader/market technician John McGinley. Information about this tool was first published in the Market Technicians Association’s Journal Of Technical Analysis as an outline in 1991 and published there as a full-blown study in 1997. I have attempted here to capture the thought processes of the mind of a master technician as he worked through the process of invention to perfection of this tool.

But before that, we must become reacquainted with some staples of technical analysis.

Moving averages
A moving average is the study of the history of time series analysis. Early practitioners used various algorithms to smooth data and flatten various-shaped curves, yet this early work was quite primitive. Graduation methods were used later, like a fitting line using a least-squares rule for plotting and construction purposes. Fitting lines using the least-squares rule was later adopted by technical analysis in the family of moving averages. This began the process of interpolating data using probability theories and analysis.

In the Journal Of The Royal Statistical Society in 1909, G.U. Yule described instantaneous averages that R.H. Hooker had calculated in 1901 as moving averages. Yule identified properties of the variate difference correlation method. The term moving averages apparently entered the lexicon shortly after in 1912 through W.I. King’s publication of Elements Of Statistical Methods.

Later adopting Yule’s studies, Harold Wold described moving averages in a 1938 study called Analysis Of Time Series. Others attribute exponential smoothing to R.G. Brown’s and Charles Holt’s individual works on inventory control in the 1950s.

Figure 1: the 10-day simple moving average. As you can see from this chart, there are too many degrees of separation, too many dropoffs, and too much indecision regarding market direction.

...Continued in the March issue of Technical Analysis of Stocks & Commodities

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