New Research: Essay Three (continued)
© Andrew Coles
Introducing the MIDAS/AC Normal Deviation Bands
As noted earlier, a number of changes have been made to the formula in the MIDAS Standard Deviation Bands to arrive at this new indicator. Another key to the new indicator is how it is plotted.
Readers familiar with my MIDAS/AC Displacement Channel (Chapter 14 of the book) will know that key to the plotting of this indicator is the fixing of the bands to the first swing high and low subsequent to its launch point. This fixing creates an ongoing relationship between price movement and the bands. This fixing is absent from the MIDAS Standard Deviation Bands in the chapter, though Bob English did indicate that he sometimes also uses the fixing technique. In any case, it must be reinstated in the plotting of the new MIDAS indicator. However, as stated, while the fixing is a fundamental part of the plotting of the new indicator, the changes to the formula are the most important.
Unlike the MIDAS Standard Deviation Bands and my MIDAS/AC Displacement Channel, the new indicator has TWO bands either side of the central standard MIDAS curve. The reason for the two bands is that there’s an additional component to the new formula which, during testing, captured swings highs and lows missed by the first part of the formula. Because of this, I decided to display the results of both parts of the formula in a single convenient indicator.
In Figure 6 below we have the first introduction to the indicator. Straightaway we’ll see the following:
In Figure 6 below, the central bolded curve is again the standard MIDAS curve. The inner bands are coloured blue and the outer bands are coloured red. The green arrows indicate the initial fixing points. The red arrows indicate the wider support and resistance identified by the outer red bands, while the blue arrows indicate narrower support and resistance identified by the blue inner bands. The four daily charts in the Flash gallery below are the DAX 30, FTSE 100, Nikkei 225, and Nasdaq 100. Some of these charts contain volume and some don’t. As a result, in some charts this indicator is created from First Generation MIDAS curves while in others the curves are Second Generation (readers not familiar with the various generations of MIDAS curves should consult Essay Two on the MIDAS Essay Orientation page). (Charts in the galleries can be paused for longer study at any time.)
Figure 6: The new MIDAS/AC Normal Deviation Bands plotted on daily charts of the DAX 30, FTSE 100, Nikkei 225, and Nasdaq 100
What I’d now like to do in Figure 7 is compare directly the plotting of the new MIDAS/AC Normal Deviation Bands with the MIDAS Standard Deviation Bands, In doing so, we’ll see the extreme fanning problem in the MIDAS Standard Deviation Bands very clearly. We’ll also see in sharp relief how the new indicator has overcome this problem to plot on fairly normal trending environments. The chart sequence begins with the new indicator followed by the MIDAS Standard Deviation Bands, resulting in three direct contrasts. (The galleries can be paused at any time.)
Figure 7: Three chart illustrations comparing the new indicator with the MIDAS Standard Deviation Bands in Chapter 15 of the book
Before writing a brief conclusion, I want to include a section comparing briefly this new indicator with my MIDAS/AC Displacement Channel in Chapter 14 of the book. Readers familiar with this indicator will want to know to what extent, if any, there is an overlap between the plotting of the two indicators. This comparison will be made on the next page.
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