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MIDAS MARKET ANALYSIS
Modified VWAP Methodologies
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Chart differences

Preliminary note on charting MIDAS curves

Throughout the book and his blog posts, David Hawkins has a preference for Equivolume charts. Equivolume is a method of charting developed by Richard Arms Junior. Arms bases Equivolume charting on the principle that the market is a function of volume and not time.


To accommodate this idea, price and volume in Equivolume charts are combined in one chart pane so that times of heavy trading volume are emphasized while light volume periods are deemphasized. David Hawkins prefers this method because the horizontal x-axis is proportional to cumulative volume and not time. One consequence of this is that MIDAS Support/Resistance curves and TopFinder/ BottomFinder (TB-F) curves will often plot more smoothly. An additional advantage in the case of the TB-F curves is that a linear regression extension line can be applied to price to intersect at the termination of the duration (cumulative volume) of the move required to create a TB-F curve. For the moment this will sound technical but it will be explained later. Alternatively readers can consult David Hawkins’ Chapter 7 of the book.


By contrast, Andrew Coles prefers candlestick charting which has time along the x-axis and not cumulative volume. Two advantages of using time-based candlesticks are first that their familiar reversal patterns can act as a filter for signals provided by the MIDAS system; and second, that they allow robust trade-management approaches in the setting of market stops. See for example Andrew Coles’ Chapter 1 of the book and in particular the section The MIDAS Approach as a Genuine Standalone Trading System.


It is possible to use MIDAS in chart formats beside Equivolume and conventional candlesticks, including Point-and-Figure, Three Point Break, and others.



This essay was written by Andrew Coles and is based in part on his article on intraday applications of First Generation MIDAS curves in Technical Analysis of STOCKS & COMMODITIES magazine 2008 - no unauthorised use of this material is permitted. © Andrew Coles



Essay one - An Introduction to VWAP and MIDAS


Introduction to volume-weighted average price (VWAP)


The MIDAS system of technical market forecasting is based on the notion of Volume Weighted Average Price (VWAP).

 

VWAP calculations have been used extensively in the brokerage industry for many years. A standard VWAP calculation represents the total value of shares traded in a particular stock on a given day divided by the total volume of shares traded in that stock on that same day. This standard method is thus a method of pricing transactions.


Two standard uses of this calculation have been used. In the brokerage industry it is used in something called a “guaranteed VWAP execution”, whereby a broker will use the VWAP to enter the market at the most advantageous position in order to guarantee a trader’s commission. In the mutual and pensions funds industry, the VWAP is used to ensure that the trader is entering the market in line with the market volume, Thus transaction costs are reduced by minimizing market impact. For a similar reason it can also be used as a means of evaluating a trader’s performance.


Until very recently, strategic trading applications of VWAP besides MIDAS were far and few between. Probably the first to emerge was trader Kevin Haggerty’s technique, first described in 1999, whereby Haggerty entered the market only if a stock price had closed above its daily VWAP. Today additional trading applications of VWAP have emerged but the focus of this essay is purely on MIDAS techniques.


Introduction to MIDAS


In contrast to standard VWAP approaches, the MIDAS system adjusts the mathematics of basic VWAP calculations to arrive at two technical analysis indicators which we now call “first generation” curves. The difference between “first generation” curves and subsequent curves is explained in Essay two. The first of these curves is called the MIDAS Support/Resistance curve (or the M-S/R curve for short) while the other is called the TopFinder/BottomFinder curve (or TB-F for short). The first curve was created as a result of thinking philosophically about what moves market prices. The second was arrived at subsequently while engaging in empirical research on the further properties of M-S/R curves.



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