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Essay on the MIDAS System

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The MIDAS System and Volume Weighted Average Price (VWAP)

The MIDAS system of technical market analysis is based on the concept of Volume Weighted Average Price (VWAP).

VWAP calculations have been used extensively in the brokerage industry for many years. A standard VWAP calculation represents the total value of shares traded in a particular stock on a given day divided by the total volume of shares traded in that stock on that same day. This standard method is thus a method of pricing transactions.

Two standard uses of this calculation have been used. In the brokerage industry it is often used in transactions known as “guaranteed VWAP executions”, whereby a broker will use VWAP to enter the market at the most advantageous position in order to guarantee a trader’s commission. In the mutual and pensions funds industry VWAP is used to ensure that the trader is entering the market in line with the volume of the market. In this way, transaction costs are reduced by minimizing market impact. For a similar reason, it can also be used as one of the means of evaluating a trader’s performance.

The only strategic trading application of VWAP we know of besides the evolved MIDAS system is the trading rule of Kevin Haggerty, whereby he enters the market only if a stock price has closed above its daily VWAP. This methodology was described in 1999 and we have no idea whether it is still in use today by him or by other traders.

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The MIDAS formulae move beyond basic VWAP calculations

In contrast to these basic uses of VWAP, the MIDAS system adjusts the mathematics of basic VWAP calculations to arrive at two very powerful technical market indicators. One of them is called the MIDAS Support/Resistance (S/R) curve, while the other is called the TopFinder/BottomFinder (TB-F) curve.

The first curve was created as a result of thinking philosophically about what actually moves market prices, while the latter was arrived at subsequently while actually carrying out empirical research on the further properties of S/R curves.

The philosophical basis of the MIDAS system can be reduced to five key tenets:

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1. The underlying order of price behaviour is a fractal hierarchy of support and resistance levels.

2. This interplay between support and resistance is a coaction between accumulation and distribution.

3. This coaction, when considered quantitatively from raw price and volume data, reveals a mathematical symmetry between support and resistance.

4. This mathematical symmetry can be used to project plausible market tops and bottoms in advance (a priori).

5. Price and volume data — the VWAP — subsequent to a reversal in trend, and thus to a major change in market/trader sentiment, is key to this process of chart projection.

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For now, these five tenets may seem complex. This need not be the case and in what follows I shall break them down into more easily understood ideas.

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Exploring MIDAS more deeply through the five tenets

Let’s take these five tenets one at a time and expand upon them, starting with the idea that price behaviour is a fractal hierarchy of support and resistance.

1. Price movement consisting of fractal hierarchies of support and resistance

This is quite a simple idea really which can be illuminated with the help of the following chart.

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Figure 1: 1m chart of Xetra DAX December 2009 futures

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In the above chart, we see three MIDAS S/R curves launched from various portions of the trend. The first (green) support curve creates support for the largest segment of the trend, as can be seen by its relative size in proportion to the trend as well as by its catching the largest significant pullback of the trend. The second (magenta) support curve supports the next largest portion the trend, which includes a significant pullback identified by the second white box. The third (yellow) support curve supports the smallest, and final, portion of the trend, as can be seen in the last two boxes before the white vertical line signals the role of the support curves becoming resistance curves. The above chart encapsulates what is meant by the phrase ‘fractal hierarchies of support and resistance levels’.

Now the basic definition of a fractal is a pattern which is self-similar at all degrees of scale. Advocates of the idea that the markets are fractal systems, such as the well-known mathematician Benoit Mandelbrot, argue that the financial markets are self-similar at all degrees of trend. The Elliott Wave system relies on the same idea. The basic notion of fractal market analysis as applied to the MIDAS system, then, is that MIDAS launch points and the subsequent heriarchies of support and resistance the S/R curves highlight all apply (fractally) at all degrees of trend.

Initially this idea was applied only to different segments of the trend on the daily charts. Andrew Coles further analysed the idea by applying it to intraday timeframes in his article, “The MIDAS Touch, part 1″. In “The MIDAS Touch, part 2″ he drew attention to several new approaches which need to be considered when applying S/R curves intraday.

2. Support and resistance phases are accumulation and distribution

This idea is purely theoretical and we cannot illuminate it further by recourse to another chart. The point is that both the launch points of S/R curves and the subsequent areas of support and resistance they identify represent new periods of accumulation and distribution respectively. For those new to trading ‘accumulation’ means the purchasing of stocks or financial instruments and ‘distribution’ means the selling of them.

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Continue to second page of essay

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