New Research: Essay Five
© Andrew Coles
The purpose of this catalogue is to provide a short reference guide to MIDAS curves that were presented in the book. The curves will be accompanied by Flash galleries containing several charts. Fourth Generation (Gen-4) curves are omitted because they are now the subject of a separate essay which can be accessed via the main Essays navigation page or here. Gen-4 curves have been given separate treatment because they now cover a very large domain and discussing this domain here would overshadow the discussion of the other curves.
This catalogue is an extension of Essay Two, which also provides (without charts) a succinct overview of the five generations of MIDAS curve that are now a central part of the MIDAS project. Readers are therefore also recommended to consult Essay Two, which can be found on the main navigation bar or here.
While readers new to the MIDAS project will of course benefit from this catalogue and from Essay Two, the ideal starting point is Essay One. Essay One can also be found on the main navigation bar or here.
In this catalogue there is an emphasis on Gen-2 curves because David Hawkins and I still don’t believe that MIDAS users appreciate the full significance of volume trends on curve plotting.
A Catalogue of MIDAS Curves
As stated in Essay Two, the term “generation” does not mean that later generations of curve are superior to earlier versions. All five generations have equal prominence in the MIDAS system depending on the chart environment and in some cases the volume relationship with price. The term “generation” merely indicates the approximate timeline of the curves.
To begin, let’s look at a list of the five generations of curves, including their main subsets:
First Generation (Gen-1) Curves
Gen-1 curves are Dr Paul Levine’s original curves in his 18 short lectures published online in 1995 to an audience that included David Hawkins (who later corresponded extensively with Levine before his untimely passing). Gen-1 curves are created by market volume and are sometimes subject to a shallow penetration by price known as “porosity” or a premature turning before they reach the curve identified by Andrew Coles and labelled by him “suspension”.
Gen-1 curves are based on a fractal understanding of market price movement and the unfolding of areas of support and resistance. Consequently Levine applied them to all degrees of trend on daily, weekly, and monthly chart timeframes. The fractal basis of the MIDAS system is discussed extensively in Andrew Coles’ Chapter 1 of the MIDAS book and is presupposed in all of David Hawkins’ chapters in the book.
The aim of my two-part first study of MIDAS Gen-1 curves in 2008 in Technical Analysis of STOCKS & COMMODITIES was to develop the curves for day trading using Metastock code, though a more thorough analysis of the curves for day trading can be found in Chapter Three of the book. David Hawkins had also tried the curves for day trading prior to 2008 before we met but the results were never published.
As I pointed out in the above study, Gen-1 curves are also susceptible to price “suspension”, the opposite phenomenon of “porosity”. Levine did not recognise the problem of “suspension” nor did he fully appreciate the critical role of volume in creating these two phenomena, describing the problem instead as intractable due to the MIDAS method being “a simple approximation to a more complex and less deterministic reality.” [Lecture 5]
As I emphasized in my Chapter One of the book, the MIDAS formula for Gen-1 curves is not the same as standard VWAP formulas in the brokerage industry. Consequently, when charted MIDAS curves curves aren’t coextensive with standard VWAP formula curves. As I discussed in Chapter 1, Levine never explained why he altered the basic VWAP formula but he undoubtedly had reasons.
Gen-1 curves are launched from major market inflection points, which Paul Levine believed represented the most important changes in market psychology, and hence those points most intimately associated with subsequent areas of support and resistance as the trend unfolds through its fractal hierarchy.
Figure 1 below is a gallery of charts illustrating Gen-1 curves on daily charts, though any chart timeframe is suitable for the charts.
Figure 1: Illustrations on the FTSE 100 and DAX 30 cash indexes and the stock Apple
Second Generation (Gen-2) Curves
Gen-2 curves serve a multitude of purposes, all of them now fundamental to the ongoing MIDAS project and representing a very significant development from Gen-1 curves. Gen-2 curves are thoroughly summarised in Essay Two here. Their main purpose is to address volume problems in the financial markets, a key issue when volume plays such a fundamental part in the plotting of MIDAS curves. Let’s look below at four key areas where Gen-2 curves are indispensable.
First – and this is little understood even by more advanced users of MIDAS – the use of Gen-2 curves is critical in market contexts where volume is either fluctuating excessively or where there are very large pronounced volume trends. In such cases, Gen-1 curves (inputting market volume) can produce unreliable areas of support and resistance plagued by often large price/curve gaps caused by porosity and suspension. Futures contract rollover is a very good example of where a volume analyst is faced with misleading volume data. Another example is the forex markets when misleading volume surges are created by simultaneous trading in different centres (eg, London and New York). As stated above, Paul Levine was unaware of the severity of these problems. Readers can see David Hawkins’ examination of pronounced volume trends over the long-term in his Chapter 6 of the MIDAS book, while a further examination of excessively fluctuating volume trends can be found in my Chapter 10 covering the FX market. In my Chapter 11, I identify four key price/volume relationships which must be understood by advanced MIDAS users. See also my Chapter 13 where I summarise partial solutions to porosity and suspension by David Hawkins and myself.
Second, some markets – most obviously the cash forex markets – do not supply volume and so the entire MIDAS system could not be applied to them before the introduction of Gen-2 curves. This is the topic of Andrew Coles’ Chapter 10. This same use of Gen-2 curves applies to market data missing volume or market data with volume the MIDAS user suspects is unreliable. David Hawkins covers this issue in his Chapter 6.
Third, there are many instances where a MIDAS user may wish to incorporate volume substitutes. MIDAS Gen-2 curves are again designed to support such extensions. An example of a volume substitute is tick data for intraday analysis of the cash forex markets. I (Andrew Coles) showed in Chapter 10 that although many traders question the reliability of tick FX data they are a very adequate substitute in standard MIDS curves and the Topfinder/ Bottomfinder.
A fourth area where Gen-2 curves have vastly opened up analysis in the futures markets is in the replacement of volume by futures open interest. This was the topic of my long Chapter 12 and the CFTC Commitments of Traders (COT) Report.
Below in Figure 2 I’ve intentionally removed the volume data in daily charts of the Nikkei 225 cash and Nasdaq 100 cash indexes to highlight the effectiveness of Gen-2 curves when volume is absent.
Figure 2: Nikkei 225 cash and Nasdaq 100 cash without market-based volume data
Before turning to Gen-3 curves, I want in Figure 3 overleaf to illustrate to readers very emphatically how problematic market-based volume can be on occasions and how in certain contexts the MIDAS analyst must use Gen-2 curves alongside Gen-1 curves so that accurate support and resistance curves can be employed in the analysis.
|Andrew Coles Blog|
|David Hawkins Blog|
|Essay One page 1|
|Essay One page 2|
|Essay one page 3|
|Essay one page 4|
|Essay one page 5|
|Essay Two page 1|
|Essay Two page 2|
|Essay Two page 3|
|Essay Two page 4|
|Essay Two page 5|