Intro to MIDAS 3
.
Essay on the MIDAS System (cont)
.
3. The accumulation and distribution is mathematically symmetrical as between support and resistance
This again is another complex sounding idea which can be reduced to more manageable ones. The idea boils down to the notion that MIDAS S/R curves can be applied to uptrends and downtrends without having to change the underlying mathematics of the formula — hence the idea of symmetry. This purely theoretical idea can also be illustrated on a chart. For example, we see in Figure 2 below that a support curve is applied to an uptrend and a resistance curve is applied to a downtrend. This is all that is meant by mathematical symmetry in the present context.
.
Figure 2: 1m chart of Xetra DAX December 2009 futures
.
Readers can skip the remainder of this section if they wish, but the mathematical detail of the ideas we are discussing can be expressed in terms of the following equation. This equation underlies all of the coding representations of the algorithm:
4. This symmetry can be used to project plausible market tops and bottoms in advance (a priori)
We need to be careful how we understand this idea for fear of too much being read into it. We have seen in Figure 1 that when a MIDAS S/R curve is launched, its purpose is to identify likely future areas where price will find support in an uptrend and resistance in a downtrend. Because the S/R curves are already plotting on a chart as prices move forward, they are predicting possible areas of support and resistance in advance. The use of the word ‘possible’ is right because, as Tom DeMark once quipped, “The trend is your friend until it comes to an end.” Likewise, a support/resistance curve will continue affecting price pullbacks only so long as the trend continues.
It’s usually the case that a market will support or resist four to five S/R curves before it ends. This knowledge plus other end-of-trend indicators can be used alongside MIDAS S/R curves.
5. Price and volume data (the VWAP) subsequent to a trend reversal (and thus to a major change in market/trader sentiment) is key to this process of chart projection
A MIDAS S/R curve is by definition a fixed starting point moving average of the VWAP. What this means can again be illuminated by the two charts we’ve already looked at. S/R curves are always launched from new swing highs and lows, either from the very start of new trends or from swing highs and lows (pullbacks) in ongoing trends.
Whichever is the case, the price and volume data subsequent to these launch points are key to the S/R curves, since no data prior to these launch points are used by the S/R algorithm. The MIDAS VWAP formula, then, is entirely unlike the formula used in conventional moving averages in so far as the latter does not discriminate between the data involved in changes in trader psychology highlighted by trend reversals and the data which come before.
It should also be added that the tenet just examined takes for granted that what follows the end of a trend is another trend in the reverse direction. This however need not be the case; indeed, the statistics suggest otherwise, suggesting that the markets are in rest mode far more than they are in trend mode. To account for this, Andrew Coles has recently developed a price channel based on the MIDAS principles he has called the MIDAS Displacement Channel to analyse resting market phases through the same S/R techniques. This indicator is the subject of a forthcoming article.
.
continue to third page of essay
