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Modified VWAP Methodologies
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Essay one continued

Exploring MIDAS more deeply continued

4. This symmetry can be used to predict 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 areas where price will find support in an uptrend and resistance in a downtrend. Because the S/R curves are already plotting on the chart as price moves forward, they are predicting possible areas of support and resistance in advance. Possible is right because areas of support and resistance are significant for only so long as the trend continues. Thus, a support curve will obviously continue supporting price pullbacks only so long as the uptrend continues and vice versa in a downtrend. Importantly, however, it’s usually the case that a market will support/resist four to five S/R curves before it ends. Hence this factor, plus other end-of-trend indicators, can be used alongside MIDAS S/R curves.

5. Price and volume data subsequent to a trend reversal is vital

What this means can again be illuminated by Figure 1.

Here, as we can see, S/R curves are always launched from new swing highs and lows. Sometimes these swings represent the start of entirely new trends, sometimes they are 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 inputs to the S/R algorithm. Thus, the VWAP formula on which MIDAS S/R curves are based is completely unlike the formula for conventional moving averages, since the latter does not discriminate between changes in trader psychology highlighted by trend reversals.


It should be added at this juncture that the fifth tenet just examined takes for granted that what follows the end of a trend (even a trend pullback within a larger ongoing trend) is another trend. This need not be case; indeed, we know that statistically markets are in resting phases, represented by sideways moving congestion, far more than they are in trending phases. To account for this, Andrew Coles created the MIDAS Channel Displacement indicator. The indicator can be found in Coles’ Chapter 14 of the book and in an earlier article in Technical Analysis of STOCKS & COMMODITIES magazine. There is more on this indicator in Essay two.

Topfinder/Bottomfinder (TB-F) curves

The focus of the previous discussion was the MIDAS system in relation to the first of its indicators, the MIDAS S/R curve. It is time to turn to the second major indicator in the MIDAS system, the TopFinder/BottomFinder (TB-F).

Figure 1

TB-F curves in relation to S/R curves

The principal difference between the two curves is in their volume displacement. To understand what this means, we need to look at another chart. (See also the image at the top of the page here and here.)

Notice first that S1 (the lowest curve in this hierarchy up to S4) moves away from price without supporting any further pullbacks

What this means is that the price trend has started to accelerate – far too much in fact for a standard S/R curve to be of any further (immediate) use. This is where the MIDAS TB-F curve assumes prominence. For another way of understanding an accelerating trend is that for a curve to keep moving with it a shorter cumulative volume displacement is required than is available in a standard MIDAS S/R curve. Thus, a quick way of understanding the difference between standard S/R curves and TB-F curves is in terms of the smaller amount of cumulative volume required to keep a TB-F moving with price as opposed to moving away from it. This can now been be seen in Figure 3 below.

Here we can see the TB-F moving down while keeping apace with the accelerated downtrend. At the same time, we see R1 (a standard MIDAS S/R curve) moving away from price without resisting any further pullbacks.

Figure 2 Figure 3 previous page next page