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Modified VWAP Methodologies
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Essay two continued

Further comments on the five generations of MIDAS curve continued

4. Very long-term secular charts

This topic was covered by David Hawkins in his Chapter 6, especially in the section MIDAS Applied to Long- and Very Long-Term Timeframes. Here Hawkins demonstrates conclusively the absolute need for second generation nominal curves when analysing secular degree timeframes where volume can aggregate into enormous trends that have a fundamental impact on the plotting of first generation curves. This is starkly evident in Figure 6.13 in the chapter where a first generation curve launched from the early 1980s on the S&P 500 captures the 2003 bottom precisely but is hopelessly out of place – because it is displaced by the volume trend – in relation to the 2009 low. On the other hand, a second generation nominal curve from the same launch point widely misses the 2003 bottom but captures to within a few index points the 2009 bottom. Few charts can demonstrate better than this one the critical use of second generation curves in certain market contexts alongside first generation curves.

In this chapter, Hawkins also discusses his own insights into working with secular degree volume data and second generation nominal curves.

5. Data sources without volume or with unreliable volume

In the same chapter, Hawkins also demonstrates the additional use of second generation curves when data vendors of instruments such as ETFs don’t supply data. This problem is the same as for higher timeframe cash forex data streams, though obviously for different reasons.

6. Futures open interest

The replacement of volume with open interest in second generation curves is the subject of my (Andrew Coles) Chapter 12 on the CFTC Commitments of Traders Report (the source of open interest data).

The rationale for sometimes replacing volume with open interest in this chapter derives from combining the insights of my Chapter 11 on the four volume rules and the insights of the new wave of open interest analysis spearheaded by Larry Williams and others.

Essentially there are many instances in the futures market where futures volume is moving in one direction while open interest is moving in another. How this is to be interpreted in relation to the work of Larry Williams and others is covered extensively in this chapter. Thereafter a great many chart-related discussions are presented where these interpretations are considered alongside my volume rules in Chapter 11.

What emerges is a powerful rationale for using second generation MIDAS curves with open in interest in certain volume/open interest relationships which occur frequently in the futures markets.


Third generation curves - a more detailed overview

As mentioned earlier in this essay, third generation curves are David Hawkins’ Calibrated Curves. These curves were the topic of Hawkins’ Chapter 9. As discussed above, second generation curves are created by changing the volume component of the MIDAS formula either (i) by a nominal 1 unit, or (ii) by tick data, or (iii) by open interest.

Calibrated Curves are not produced by having any part of their formula changed. Instead, what defines a calibrated curve is that it is launched from relatively minor pullbacks in the trend instead of the major ones advocated by Paul Levine.

Like Levine before him, Hawkins was well aware that curves launched from major price pullbacks – ie, those inflection points supposedly best reflecting largescale changes in market psychology – resulted in price penetrating the curves (ie, price porosity), often by a significant margin. Over time Hawkins realised that curves launched from smaller inflection points sometimes did a better job of capturing the major pullbacks. He called curves launched from these more modest price pullbacks Calibrated Curves. Hawkins’ methodology for launching these curves with chart illustrations can be found in Chapter 9.  

Calibrated curves, then, represent another solution to the problem of price porosity. As indicated above, price porosity – and its converse, price suspension – were also discussed by me in Chapter 13 where I gave other solutions to these problems by David Hawkins and myself.


Fourth generation curves - a more detailed overview

As is clear by now, second generation curves are created by using volume inputs other than market volume. Sometimes this is a nominal one unit and sometimes it is tick or open interest data.

By contrast, fourth generation curves are created by using inputs other than market price. The only qualification on using other data is that the time series produces fractal trend characteristics similar to a price series. In my Chapter 16 I (Andrew Coles) selected the OBV indicator for two reasons. First, it satisfies this qualification easily; and second, it produces three important signals in relation to price, including confirmations and disconfirmations. Because of the latter, OBV MIDAS curves reveal new areas of support and resistance not identified by price-based curves as well as create several trading setups such as my the Dipper setup (p377).

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