Coles and Hawkins, MIDAS Technical Analysis

Anyone who trades using technical analysis would do well to read MIDAS Technical Analysis: A VWAP Approach to Trading and Investing in Today’s Markets (Bloomberg/Wiley, 2011) by Andrew Coles and David G. Hawkins. It’s not that the MIDAS method, pioneered by Paul Levine in 1995, is the holy grail. I recommend the book because the authors have done such a thorough job of explaining and, after extensive research, expanding on the notion of volume-weighted support and resistance curves. In the process they touch on a wide range of technical approaches to the market, some of which I suspect will be unfamiliar to the majority of readers. 

Coles and Hawkins, like so many who end up in technical analysis and trading, have academic backgrounds. Coles earned a Ph.D. from the University of London with a dissertation on biological themes in philosophy and medicine in ancient Greece. Hawkins has an M.S. in physics from Brown and taught at the university level. And the original developer of MIDAS was a theoretical physicist with a Ph.D. from Caltech. “Overeducation” can sometimes result in overthinking a problem. Midas Technical Analysis exhibits its fair share of overthinking, but that doesn’t mean that it’s merely a theoretical study. Far from it.

The MIDAS method was a development of or variation on VWAP (volume weighted average price). First, Levine modified the original VWAP formula. Second, he thought it important to anchor his support and resistance curves at a point where there was a change in the underlying psychology. That is, “instead of ‘moving’ averages, one should take fixed or ‘anchored’ averages, where the anchoring point is the point of trend reversal.” (p. 11) And third, he believed the markets to be fractal.

Coles and Hawkins start from the basic MIDAS premises, but they set out to develop a full trading system, not just a forecasting method. The two authors work on different time horizons: whereas Coles trades intraday, Hawkins focuses on longer-term charts. And they presumably have different interests as well. So each chapter in the book has a single author.

The chapters cover a broad range of topics. For example, MIDAS curves and day trading; applying the topfinder/bottomfinder to investor timeframes; equivolume, MIDAS, and float analysis; standard and calibrated curves; MIDAS and FX; MIDAS and the Commitments of Traders report; a MIDAS displacement channel for congested markets; and MIDAS and standard deviation bands. Appendixed to the text is MetaStock code for the standard MIDAS S/R curves and TradeStation code for the MIDAS topfinder/bottomfinder curves.

The trading plan the authors present is discretionary. There are no hard-and-fast buy and sell rules, though Hawkins offers a set of directions. Judgment is required throughout: for instance, where to anchor a curve, how to interpret multiple timeframe curves, and what kinds of market data to consider in addition to what’s on the chart.

In this more than 400-page book Coles and Hawkins take the reader down highways and byways, describing the scenery all along the way. Some of scenery is Kansanian (with due apologies to any readers from Kansas), but much is intriguing. The book is, to shift metaphors, definitely several cuts above the standard technical analysis fare.