New Research: Essay Three (continued)
© Andrew Coles
Limitations of the MIDAS Standard Deviation Bands in my Chapter 15 of the Book (continued)
Finally, below in Figure 3 are two examples of the price pattern identified in (c), namely very sharp angular price moves. These moves often occur after a period of flat or stagnating price activity, though they appear in larger zigzag formations below. The blue arrow in each chart highlights where the Standard Deviation Bands would be launched. The red arrows highlight where the Bands would ideally support and resist price.
Figure 3: Two sharply angular price moves in daily charts of the Nikkei 225 cash index and Nasdaq 100 cash index with blue arrows indicating likely launch points for the MIDAS Standard Deviation Bands and the red arrows highlighting ideal support and resistance points
Unfortunately, as we see in Figure 4 below, even when the MIDAS Standard Deviation Bands are applied to the sharply angular price movements in Figure 3, the tendency of the Bands to fan out (a) much too quickly, and (b) much too widely prevents them from supporting and resisting the main swing highs and lows. The blue and red arrows indicate initially successful support and resistance. But the green arrows and vertical blue lines indicate the fanning problem. (The bolded central red curve is of course a standard MIDAS curve.)
Figure 4: The blue arrows highlight successful support and resistance while the green arrows and blue lines indicate the severity of the fanning problem
However, as I stated in the introduction, I do not recommend scrapping the MIDAS Standard Deviation Bands. I gave numerous examples in Chapter 15 of the MIDAS book where the Bands provided adequate support and resistance. In the final part of this section in Figure 5, I’ll just reassure readers that the MIDAS Standard Deviation Bands still have a role to play by reproducing a couple of charts from Chapter 15 of the book. These illustrations are intraday and highlight how effective the indicator can sometimes be not just for the day trader but also for the swing trader. The bolded black middle curve is again the standard MIDAS curve.
Figure 5: Intraday applications of the MIDAS Standard Deviation Bands in Chapter 15 of the book on DAX futures with the bolded black middle curve the standard MIDAS curve
However on the next page I’ll introduce the new MIDAS/AC Normal Deviation Bands. Straightaway we’ll see how they can be applied extensively to normal trendlike conditions without the two aspects of the fanning problem highlighted.
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