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Modified VWAP Methodologies

Summary Essay: Essay Seven (continued)

Catalogue of All Six MIDAS Indicators with Flash Charts (continued)

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MIDAS/AC Quadrating Price Levels

As with the MIDAS/AC Displacement Channel and MIDAS/AC Normal Deviation Bands, I’m not going to say much about this new indicator here because it is the subject of a separate essay which can be accessed here or on the site’s main essay page. Readers can alternatively access my blog post on the indicator dated Tuesday 4 February 2014.

The new indicator automatically quadrates (adapts, harmonizes, conforms) to four basic variables:

1) The higher timeframe chosen (daily, weekly, monthly, etc) to create the indicator’s “outer levels”

2) The intraday timeframe chosen to create the indicator’s “inner levels”

3) The direction of the intraday trend

4) The volume

I’ll say more about these four variables below.

Attributes of the new indicator

The new indicator consists of five price levels which at first sight resemble the familiar price Pivot Points. However, the plotting of the five levels is not coextensive with the Pivot Points and the underlying theory behind the new levels differs significantly, especially with the integration of data from variables (2), (3) and (4). From the top down I label the levels Q5 to Q1, with Q3 being the middle level (this level is merely labeled “pivot” in the standard Pivot Points).

In the remainder of this post, I’ll expand a little more on the four variables while adding a few charts.  

Variable #1: Adaptation to the Higher Timeframe Chosen

Monthly and Weekly charts

First, the levels adapt to whatever higher chart timeframe is chosen while simultaneously creating new levels. This capacity is shared with standard Pivot Points. However, the new Quadrating Price Levels aren’t coextensive on any timeframe with standard Pivot Points. This is illustrated in the essay.

Figure 6 below is a monthly cash chart of the German DAX index from the start of the current uptrend in August 2011 to the present (February 2014).

As can be seen, the levels perform a very adequate role (especially Q4 and Q2) in capturing the high and low of each month respectively. Q5 and Q1 (the outermost levels) are often further away from the monthly extremes. The reader will also notice that Q3 frequently captures the opening price of each month.

In the essay I’ve plotted standard Pivot Points on top of the new Quadrating Levels for comparison. The essay also contains an illustration of the Quadrating Levels on the weekly charts.  

Figure 6: Monthly chart of DAX with levels Q5 to Q1

Daily charts

Turning to daily charts, it’s common practice for day traders to project the standard daily Pivot Points (P, R1, R2, S1, S2) onto a preferred intraday timeframe. Traders should also do the same with the daily Quadrating Price Levels (which, to stress again, are not coextensive with standard Pivot Points). The daily levels thus create what I call the “outer levels” on the intraday chart. (Of course, if the price trend is near a weekly or monthly Quadrate Level then it should always be noted.)

Figure 7 covers approximately 14 trading days In October 2013 of the DAX cash index with the standard Pivot Points in blue and the Quadrating Levels in bolded red. Although the two indicators occasionally produce coextensive levels, most of the time the levels are mildly or significantly different. Moreover, when there is an overlap it is nearly always between alternative curves – for example, Q3 with R1 in the standard Pivot Points and so forth.

I have highlighted one bar in Figure 7 with a green box and arrow because it illustrates well how different the levels created by the two indicators can be on occasions.

Figure 7: daily chart of DAX with standard Pivot Points in blue and the new levels in bolded red

The second way the levels quadrate (adapt) is in relation to the intraday trend. This is one of three areas where the new indicator differs fundamentally from standard Pivot Points. In the present case, while the standard Pivot Points are static horizontal lines a trader will project across his or her chart for the day’s trading session, Quadrating Price Levels adjust up or down in real-time in response to whether price is uptrending or downtrending. When price is moving sideways the curves will flatten.

We’ll look at an illustration in Figure 8 in a moment after covering volume.

Variable #3: Adaptation to the volume trend

The third way the new levels adapt is in relation to the volume trend. Volume has an effect on the “outer levels” and “inner levels”.

As I discussed in Chapter 11 of the MIDAS book, there are four basic relationships between price and volume and each relationship determines a rule-like response in plotting MIDAS curves. Volume therefore plays a fundamental role in the placement of the new curves just like any other MIDAS curve.

Figure 8 below 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 3: Adaptation of the levels to a 30m DAX futures chart

More illustrations across all timeframes, including the intraday, are available in the essay.

I’ll complete the discussion of this indicator overleaf and round off with Bob English’s detrended oscillator.







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