New Concepts in VWAP and MIDAS Market Analysis

Most have at least heard of VWAP, or volume weighted average price.  It is a measure of the average price paid over a period of time, and can be implemented a number of ways.  Often, the calculation is reset daily, though in the MIDAS Method that was created by Paul Levine it is launched from important reference points in time and allowed to continue (called a Midas curve).

The original formula is simple.  For each price bar, the following is applied:

PV = PV + (Price * Volume)
CumeVolume = CumeVolume + Volume
VWAP = PV / CumeVolume

where Priceis usually (High + Low + Close) / 3.  Coles and Hawkins of MIDAS Market Analysis have also discovered it is permissible to use just the High in a downtrend, and the Low in an uptrend, which will cause the Midas curve to follow price a bit more closely.  They will reveal additional insights and modifications in their upcoming book.

For now, we have modified the formula to accelerate or decelerate the curve above/below the main Midas curve by incrementally increasing/decreasing each new bar’s contribution as follows:

PV = PV + (Price * Volume * Factor * Count)
CumeVolume = CumeVolume + Volume
VWAP = PV / CumeVolume
Count = Count + 1

By including a range of values for Factor, such as 1.00005, 1.000010, 1.000015, …, 1.000100, we can establish an entire Accelerated/Decelerated Midas support and resistance fan (ADM Fan).  One could think of it loosely as a volume-based Gann fan.  While this works with time charts, it has empirically been found to work best with volume charts, wherein each bar represents a fixed number of shares/contracts.  A good rule of thumb for the Factor range is that the minimum should be within an order of magnitude of 1 / ContractsPerBar, which depends on how the chart is set up.  The maximum can be three orders of magnitude (x 1000) higher and will depend on the steepness of the trend.  It is usually not necessary to curve-fit the increment and range as long as the launch point is correctly chosen.

Above shows the ES with an ADM Fan launched from 11:56 am EDT on February 25, 2010.  We chose this time, and not the time corresponding with the actual low, because it was from here that the market launched higher.  The blue line is the original Midas/VWAP curve, which captured price early.  As price displaced from the Midas curve, Accelerated Midas curves took over and became both support and resistance.  None of the Decelerated Midas curves was reached.  However, for a good example of what this looks like, we will show the ADM Fan launched from the actual aforementioned low at 9:45 am the same day.

Above, the third Decelerated Midas curve captured the 11:56 am retest of the low, which was the launching point for the ADM Fan in the first chart.  This Fan also captured highs and lows fairly well.

Because the ADM formula weights bars increasingly more as time progresses, the fan, as its name implies, spreads out.  By decreasing the increment amount by which the Factor is increased, we can generate more support and resistance lines that become relevant over time.

Below shows an even lower Factor increment amount that produces yet more levels, along with a new ADM Fan launched on the overnight low of March 4, 2010.  When confluence occurs in curves from different launch times, support/resistance is more powerful.

It would be easy for a chart to get cluttered (if it is not already), so selection of launch points is of great importance and an area of current development.  In general, important highs and lows work well, but sometimes it is best to launch, not from the actual low, but the point at which price takes off (as demonstrated earlier).  Launch points from areas that are important support and resistance levels based on other methods also work well.

Below is another example, where an ADM Fan is launched in the EuroFX futures contract near the 4:20 am low on March 2, 2010, which was a new yearly low.

Below shows a reduced Factor increment that in turn produces a greater number of relevant support and resistance levels.

Reverse Midas ™ / Reverse VWAP ™

The indicator at the bottom of the above picture is Reverse Midas/VWAP, and is calculated as its name implies.  For each given bar, iterate backwards, calculating VWAP until zero is reached.  Buyers or sellers at this bar were at break even when the subsequent bar from which the backwards iteration began was reached.  Once the first equilibrium/breakeven point is reached, we continue to iterate backwards until the next is encountered, and repeat the procedure for a total of 5 (arbitrarily chosen) times.  The volume levels between the points are then plotted below price.  Also important (not shown), is the maximum average profit and loss achieved over these intervals, which is akin to the Active Boundaries ™ method described by Pascal Willain in his book Value in Time.

Often, as a trend progresses, equilibrium points will build and be revealed as clusters by the indicator, which will eventually tend to stop the move.  When the clusters disappear, there are fewer traders fighting price and a new trend can emerge.  A similar phenomenon occurs when there is a cluster reached of extreme average profit/loss.  Again, this is not shown, but will be demonstrated in future posts as we further elaborate on these concepts.  Also to be explored is the importance of certain volume levels that emerge repeatedly over time from these calculations, which can be relevant to other parts of the Midas Method, such as with Top/Bottom Finder curves.