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Modified VWAP Methodologies

New Research: Essay Five (continued)

Catalogue of MIDAS Curves Except Fourth Generation (Gen-4) Curves

© Andrew Coles

Second Generation (Gen-2) Curves (continued)

Figure 3 below contains two charts highlighting the dramatic impact of volume trends on the plotting of MIDAS curves. In both charts, the solid black line is a Gen-1 curve and the dotted line is a Gen-2 curve. The first chart is a long term monthly chart of the Dow Jones Industrial Average with sharply uptrending volume which draws up the Gen-1 curve well away from price by 2009. Because the Gen-2 curve is unaffected, the two curves provide support for two of the most significant bottoms in recent stock market history. The second chart is of NYMEX palladium futures in a long term uptrend, this time highlighting the effect of a falling volume trend on the impact of the curves and thus reversing the displacement of the Gen-1 and Gen-2 curves. In Chapter 11 I set out four crucial rules for understanding price/volume relationships and how they impact Gen-1 and Gen-2 MIDAS curves.

Figure 3: Uptrending volume in the Dow Jones Industrial Average and downtrending volume in long term continuous NYMEX palladium futures

Third Generation (Gen-3) Curves

MIDAS/DH Calibrated Curves are discussed by Hawkins in Chapter 9. These curves are not created in virtue of having any part of their formula changed. Rather what defines this curve is that it is launched from relatively minor pullbacks or inflection points 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 – that is, those inflection points supposedly best reflecting largescale changes in market psychology – occasionally resulted in price penetrating the curves (porosity), often by a significant margin. Over time, Hawkins realised that curves launched from smaller, often apparently insignificant, inflection points sometimes did a better job of capturing the major pullbacks. Hawkins’ full methodology can be found in Chapter 9. See also Chapter 13 where Calibrated Curves are again discussed alongside other techniques for dealing with price porosity and price suspension.

Figure 4 below is a gallery of two charts illustrating Calibrated Curves. Note the launch points from minor inflection points capturing major pullbacks.

Figure 4: Minor (calibrated) launch points capturing large pullbacks otherwise missed by standard launch techniques

Fourth Generation (Gen-4) Curves

As noted in the introduction to this essay, Gen-4 curves are now the subject of a separate essay which can be accessed here or on the main navigation MIDAS essays page. As noted earlier, Gen-4 curves now cover a very wide domain and a detailed discussion here would overshadow the discussion of the other curves.

Fifth Generation (Gen-5) Curves

Gen-5 curves were developed by Bob English, formerly of the Precision Report. English’s Gen-5 curves were discussed briefly in the second half of Chapter 17 of the MIDAS book alongside other contributions by English to the MIDAS project.

Gen-5 curves consist of two curve types, namely what English called MIDAS/BE Average curve and MIDAS/BE Delta curve respectively.

To summarise the discussion in Essay Two, MIDAS Average curves are created by averaging a standard MIDAS curve while MIDAS Delta curves are plotted equidistant on the other side of the standard curve.

English developed the curves to handle more effectively steeper price trends that aren’t moving sufficiently quickly to justify the use of a standard Topfinder/ Bottomfinder nor slowly enough for a standard MIDAS curve to be so effective. One solution would of course be to launch several standard MIDAS curves, as one would expect to do as the trend mildly accelerates and decelerates after each pullback. But one advantage in using fifth generation curves is that far fewer of them need to be launched.

English observes that the MIDAS Average curve is particularly effective on longer-term charts, which he illustrates on secular degree stock and index futures charts.

Figure 5 below illustrates the use of Gen-5 curves with the same charts that English submitted for the chapter.

Figure 5: An illustration of MIDAS/BE Average Curves and MIDAS/BE Delta Curves

Readers may now wish to consolidate their understanding of of these curves with an appreciation of Gen-4 curves here or look instead at the Catalogue of MIDAS Indicators in Essay 7 here.

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