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61 lines
2.8 KiB
Markdown
61 lines
2.8 KiB
Markdown
# MGDI: McGinley Dynamic Indicator
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> "John McGinley saw moving averages failing in fast markets and said, 'It's not the market's fault, it's the math's fault.' MGDI is the apology."
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MGDI (McGinley Dynamic Indicator) looks like a moving average, but it's actually a smoothing mechanism that adjusts itself relative to the speed of the market. It was designed to solve the problem of "lag" and "whipsaw" simultaneously by using a formula that automatically adjusts the smoothing factor based on the distance between the price and the average.
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## Historical Context
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Published by John McGinley in the *Market Technicians Association Journal* (1991), the Dynamic was created to be a "market tool" rather than just an indicator. McGinley argued that moving averages should not be fixed to a specific time period because the market's speed is not fixed.
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## Architecture & Physics
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The MGDI formula is unique. It looks like an EMA, but the smoothing constant is dynamic and depends on the ratio of Price to the previous MGDI value.
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- **Price > MGDI**: The market is speeding up (or recovering). The denominator grows, slowing the adjustment to prevent overshoot.
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- **Price < MGDI**: The market is falling. The formula adapts to hug the price without breaking.
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### Zero-Allocation Design
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The implementation is extremely lightweight.
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- **State**: Only requires the previous MGDI value.
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- **Math**: Pure scalar operations. No buffers, no loops.
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## Mathematical Foundation
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$$ \text{MGDI}_t = \text{MGDI}_{t-1} + \frac{P_t - \text{MGDI}_{t-1}}{k \times N \times (\frac{P_t}{\text{MGDI}_{t-1}})^4} $$
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Where:
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- $N$ is the period (roughly analogous to an EMA period).
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- $k$ is a constant (usually 0.6).
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- The term $(P_t / \text{MGDI}_{t-1})^4$ is the accelerator/decelerator.
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## Performance Profile
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This is one of the fastest adaptive indicators available.
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| Metric | Score | Notes |
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| :--- | :--- | :--- |
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| **Throughput** | High | Scalar math |
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| **Complexity** | O(1) | Constant time update |
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| **Accuracy** | 9/10 | Hugs price closely without breaking |
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| **Timeliness** | 8/10 | Accelerates to catch up to price |
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| **Overshoot** | 9/10 | Specifically designed to minimize overshoot |
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| **Smoothness** | 9/10 | Visually pleasing, organic curve |
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## Validation
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Validated against standard definitions and TradingView implementations.
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| Provider | Error Tolerance | Notes |
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| :--- | :--- | :--- |
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| **TradingView** | $10^{-9}$ | Matches `mcginley` |
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### Common Pitfalls
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1. **Not an EMA**: Do not treat it like an EMA. It does not have a fixed alpha.
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2. **Period Meaning**: The "Period" $N$ is a calibration constant, not a hard window size. An MGDI(14) does not "look back" 14 bars in the traditional sense; it's just calibrated to that timeframe.
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3. **K Factor**: The constant $k=0.6$ is standard. Changing it changes the sensitivity.
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