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Modified VWAP Methodologies

New Research: Essay Four (continued)

Essay on MIDAS/AC Quadrating Price Levels (continued)

© Andrew Coles

“Inner Level” functioning on Intraday Charts

As highlighted in the introduction, the new indicator adapts to intraday data in three ways:

  1. The levels will adapt according to the direction of the intraday trend (up, down, or sideways)
  2. The levels will adapt according to the intraday timeframe chosen
  3. The levels will adapt according to the volume trend

I’ll begin by illustrating (1) and (3) in Figure 6 below.

Figure 6 is a 30m chart over two days of the DAX futures December 2012 contract. As we see, unlike the static horizontal standard Pivot Points, the Quadrating Price Levels adapt to the changing direction of the trend. They will also adapt to changing volume conditions, thus combining an overall conformation of price and volume.

Figure 6: 30m chart of DAX futures highlighting the way the Quadrating Price Levels adapt to the changing direction of the trend

We’ll now turn to the second way the levels adapt, that is, according to the intraday timeframe chosen.

I noted that Figure 6 above is a 30m chart over two trading days. Figure 7 below is the same two day period but this time with a 5m chart. The reader will see that the levels have narrowed considerably as a result of the reduction of the chart timeframe.

Figure 7: Narrower quadrating levels as a result of the reduction of the chart timeframe from 30m to 5m

Recommendation for choice of intraday timeframe

I’d recommend that the day trader adjust his or her timeframe according to the initial range expansion during the first hour of trading. If the range is narrow, a 5m to 10m timeframe can be selected so that the Quadrating Levels are “fixed” to the high and low of the first hour. If the range is much wider, the trader can choose a 30m or 60m timeframe. Some days have exceptionally wide ranges and in such cases the trader can choose a 120m, 180m, or 240m timeframe.

A familiar methodology

Readers familiar with my approach to the MIDAS project will know that a recurrent feature of my indicators is the “fixing” methodology. In my MIDAS/AC Displacement Channel, the fixing is created by means of a percentage displacement. In my MIDAS/AC Normal Deviation Bands, the fixing is achieved by means of deviation calculations. Here in the Quadrate Price Levels the fixing is created through chart timeframe changes.

Combining the Outer Levels and Inner Levels on a 30m Chart

As noted earlier, a day trader will select the daily timeframe and project onto today’s chart the five levels, Q5 to Q1, for his or her “outer levels”. If weekly or monthly levels are very near to the price action, these levels will also be noted.

Next, the day trader can observe the first hour’s trading and select an intraday timeframe to create the “inner levels”. The timeframe might be as low as 5m or less, or it might be 60m or higher. Timeframes can obviously be adjusted further as the trading day continues.

Figure 8 below is the second of the two trading days already selected in Figures 6 and 7. First, the three horizontal blue lines are Q4, Q3, and Q2. Levels Q5 and Q1 are too far away to be noteworthy. As can be seen, Q3 – always the middle curve of the five – is a clear support for a large portion of the day while Q2 accurately forecasts the low of the day. Second, the 30m “inner levels” capture all of the remaining price action, including the high of the day.

Figure 9: Combining daily “outer levels” with 30m “inner levels” to create a compelling combination of support and resistance

The final chart overleaf illustrates a combination of the new indicator with other MIDAS indicators.




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