Intro to MIDAS 4
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Essay on the MIDAS System (cont)
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by Andrew Coles
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So far, the previous discussion has focused on the MIDAS system in relation to the first of its indicators, the MIDAS S/R curves. I’m not at this stage going to discuss the MIDAS Channel Displacement indicator until an article based on it sees the light of day. But it is time now to turn to TB-F curves.
TB-F curves in relation to MIDAS S/R curves
The principal difference between the two types of curve is in their volume displacement. To understand in simple terms what this means, we need to look at another chart.
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Figure 3: NYMEX light sweet crude oil continuous futures
Notice first the blue curve, which is actually a MIDAS support curve. Now notice next that this blue curve moves rapidly away from the uptrend, with the result that it plays no further role on the chart until it supports the two price corrections on the far right of the chart highlighted by the red bar (the penetration of the blue curve to the left of the red bar before responding to it is known as “porosity” and was touched upon in the previous discussion).
Now what the fact that the blue curve has moved away from the initial trend means is that the price trend has started to accelerate — far too much in fact for the blue MIDAS support curve to keep up with it. This is the defining test which identifies an accelerating trend and is where a MIDAS TB-F curve comes into play.
For another way of understanding an accelerating trend is that a shorter cumulative volume displacement is required to keep up with the trend than is available in a standard S/R curve now moving away from the trend. Thus, a quick way of understanding the difference between standard MIDAS S/R curves and TB-F curves is in terms of the smaller amount of cumulative volume required to keep a TB-F curve moving at the same speed as the trend. This can be seen clearly in Figure 3, where the yellow TB-F curve rapidly moves apace with the accelerating trend which terminates during the first week of June 2009.
Working with TB-F curves
There are two main aspects of working with TB-F curves that must be understood. The first is that the implication of price breaking through the curves is identical to the implication of price breaking a standard S/R curve, namely that the trend – or at least this portion of it – is now at an end. The second aspect is much more subtle and we need to spend more time discussing it. It involves again the notion of cumulative volume and specifically the idea that a TB-F curve requires a smaller amount of cumulative volume than a standard S/R curve to keep it moving in sync with an accelerating trend.
A prescient reader may already be asking the question, how do we ensure that we do in fact have a smaller amount of cumulative volume in the TB-F curve than in a standard MIDAS S/R curve?
The answer is that the user of a TB-F curve supplies this smaller amount of cumulative volume himself. Depending on the software, one way of doing this is for the user to drag the TB-F curve to an appropriate place in relation to the trend and then for the software to calculate this amount of cumulative volume automatically. This method is used in the StockShare trading platform in relation to which David Hawkins recently acted as a consultant. Another method is to input this cumulative volume manually. This is the method Andrew Coles currently uses in eSignal. This method may sound time-consuming and onerous but it only takes a few moments.
The next question our prescient reader is probably asking is, okay, if the cumulative volume must be supplied to the curve independently, how does the user know precisely how much cumulative volume to supply to the algorithm creating the curve?
The answer to this question is supplied in Figure 4.
Figure 4: the correct fitting of a TB-F curve
Figure 4 consists of a hypothetical rising trend in black, with the red curve illustrating a standard MIDAS support curve moving away from price as it does in Figure 3. The green curve represents an actual TB-F curve. The two other blue curves are also TB-F curves, but they illustrate what happens if too much or too little cumulative volume is supplied to the TB-F curve. If too much cumulative volume is inputted the curve underfits the trend, as can be seen in the blue curve nearest to the hypothetical red support curve. If too little cumulative volume is inputted, a TB-F curve overfits the trend by accelerating even faster than it, as can be seen by the uppermost blue curve.
The precise amount of cumulative volume required to accelerate a TB-F to match the accelerating trend is the same as that required to fit the TB-F to the first pullback in the trend highlighted at point ‘A’.
As mentioned earlier, this can be done automatically in a software program like StockShare by the user dragging the curve to the pullback; it can also be done manually by a trial-and-error procedure, as we currently have working in eSignal.
The precise amount of cumulative volume to have a TB-F correctly fitted to a trend via the first pullback is known as D, which stands for the duration of the accelerated trend. D of course will be a finite amount of cumulative volume. For example, if we go back to the crude oil futures illustration in Figure 3, the TB-F curve is fitted to the first visible pullback in the trend with a cumulative volume of 9,999,999.
Now it is this concept of duration which gives a TB-F curve its other dramatic feature which makes it markedly different from a standard MIDAS S/R curve. For what a finite amount of cumulative volume implies is that the cumulative volume inputted on each bar will eventually run down to zero, thus terminating the algorithmic process. What this means in turn is that a TB-F curve will come to a literal stop on the chart when D, the duration, is exhausted.
We can again see this illustrated in Figure 3. When the TB-F curve is fitted to the accelerated trend via the first visible pullback in virtue of being provided with a cumulative volume of 9,999,999, it literally comes to a stop within one bar of the end of the trend. Thus, the other aspect of a TB-F curve which distinguishes it from a standard MIDAS S/R curve is its ability to indicate, on the termination of its cumulative volume, that there will be some such response in the trend itself. We shall have more to say about this below.
When thinking about D, the duration, then, it is useful to think of it in terms of a finite force stretching out an elastic band. Because this force is finite, the elastic band will be stretched to a point proportionate to the force before it snaps back to its original configuration. Now the pulling out of the band represents the accumulation phase of a stock or futures contract being purchased, while the snapping back represents the distribution (selling) phase. Because the force — the accumulation phase — is proportionate to the pull of the elastic band — the distribution phase — the TB-F tends to be an extremely accurate indicator of when the acceleration will end and when there will likely be some type of response in the price.
It is important to use the phrase ’some type of response’ instead of ‘the end of the trend’ because the latter would be a presumption and not a solid piece of information supplied by the TB-F curve. Think of it in this way. If a force pulls out an elastic band and then gives way so that the elastic band snaps back together, it does not follow that the same force will repeat the same effect straightaway; indeed, it does not follow that anything will happen. There may well be a long resting phase or only a short interval before the elastic band is pulled out again. Thus, when a TB-F curve is indicating that the cumulative volume (D, the duration) is running down to zero and that the curve (and the associated accelerated trend) will soon come to an end, all this means is that there is likely to be some response in the price — not necessarily that there will be a change in the direction of the trend. It may be, for example, that the market will now go into a resting phase, which is where Andrew Coles’ MIDAS Displacement Channel would have a role to play.
It also needs to be emphasized that TB-F curves have a far smaller role to play in chart analysis than standard MIDAS S/R curves simply because accelerated trends are much less frequent. However, TB-F curves can be used more than might originally be expected due to the fractal nature of market price movements, a notion we discussed earlier. Because trends are fractal, an accelerated portion of a trend may well appear in the middle of a much larger slower trend, in which case TB-F can certainly be applied.
The mathematical implications of working with TB-F curves
Readers only interested in the trading implications of working with TB-F curves can skip this section. But the mathematical implications of what we’ve been discussing can be expressed in terms of the following formula for TB-F curves:
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Putting it all together
The MIDAS system of technical analysis can be understood as a genuine and robust standalone system of market analysis in much the same way as other standalone systems such as Elliott Wave theory.
Two main factors combine in the system to make this possible. The first is the fractal nature of the MIDAS system, meaning that no portion of the trend is exempt from the application of standard S/R curves or TB-F curves. As we’ll occasionally illustrate in the Blog, even standard S/R curves that have moved away from accelerated portions of the trend still have vital roles to play when those portions end and price reverses towards these curves to test support or resistance.
Second, even when the trend is accelerating away from standard S/R curves, the MIDAS system still has a second indicator up its sleeve to cope with this new change in price action.
Finally, even when price is moving in sideways resting phases, there is now a third MIDAS indicator to apply directly to it.
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We now invite you to read the blog!
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