There are three components to a Goodman chart: a trend or swing, a matrix, and a Goodman Wave. Swings build into matrices and matrices build into waves. A Goodman Wave is a completed set of five swings of price; one matrix becomes a component of a larger matrix—the wave.
Trend
A trend is a price movement over some period of time without a significant correction (a price move in the direction opposite the trend). The operative word here is significant.In Goodman, corrections of 25 percent of the trend or less are seldom significant.
In GSCS, a trend is called a swing. See Figure 5.15.
Fifty Percent Move and Measured Move
The cornerstone of GSCS is the old “50 percent retracement and measured move” rule. This rule, familiar to most traders, is almost as old as the organized markets themselves. It has been traced to the times when insiders manipulated railroad stocks in the nineteenth century. See Figure 5.16.
The first systematic description of the 50 percent rule was given in Bur- ton Pugh’s The Great Wheat Secret, originally published in 1933. In 1973, Charles L. Lindsay published Trident. This book did much (some say too much!) to quantify and mathematically describe the 50 percent rule. Neverthe- less, it is must reading for anyone interested in this area of market methodology.
Edward L. Dobson wrote The Trading Rule That Can Make You Richin 1978.
T h e C o d e x To o l b o x 83
Chapter 05_[67-99].qxd 9/21/07 7:34 PM Page 83
This is a good work with some nice examples. But none of these, in my opin- ion, even scratch the surface relative to Goodman’s work.
The logic of the 50 percent rule is quite simple. At a 50 percent retracement, both buyers and sellers of the previous trend (up or down) are, ceteris paribus, in balance. Half of each holds profits and half of each holds losses. See Figure 5.17.
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 260 270 280 290 300 310 320 330 340 0
1 2 3 4 5 6 7 8 9 10 11 12
FIGURE 5.15 A Trend or Swing.
In GSCS a trend or swing is simply a price movement in one direction with less than a 25 percent correction.
A b
a
c d
e
f
C B
FIGURE 5.16 The 50 Percent Retracement and Measured Move Rule.
This is one of the oldest trading ideas but still one of the best. The example shown here is a Goodman Wave. In the author’s opinion it is the most tradable pattern in all of the markets.
This equilibrium is a tenuous one, indeed. The distribution of buyers and sellers over the initial price trend or swingis not perfectly even: Some buyers hold more contracts than other buyers. They also have different propensities for taking profits or losses. Nor does it account for the buyers and sellers who have entered the market before the initial swing or during the reaction swing. Not all of the buyers and sellers from the original swing may be in the market any longer.
Remarkably, GCSC eventually takes all of this into account—especially the buyers and sellers at other price swing levels, called matrices.
Nevertheless, the 50 percent retracement point is often a powerful and very real point of equilibrium and certainly a known and defined hot spot of which the trader should be aware. Remember that both the futures markets and the cur- rency markets are very close to a zero-sum game. It is only commissions, pips, and slippage that keep them from being zero-sum. At the 50 percent point, it doesn’t take much to shift the balance of power for that particular swing matrix.
The 50 percent rule also states that the final (third) swing of the move—
back in the direction of the initial swing—will equal the value of the initial swing. The logic of this idea, called the measured move,is seen in Figure 5.18.
As I have indicated, examples of the 50 percent rule occur at all price levels or matrices, and many are being worked simultaneously in any given
T h e C o d e x To o l b o x 85
B
A
D C
Equilibrium of Buyers and Sellers
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FIGURE 5.17 A Market Tug of War.
The 50 percent retracement is the price area to watch! It represents the point or area where buyers and sellers of the primary trend are in aggregate equilibrium.
Chapter 05_[67-99].qxd 9/21/07 7:34 PM Page 85
ongoing market. This refractive behavior is a critical point. Simply stated, this means that without labeling, you could not really tell the difference between a 10-minute chart and a daily or weekly chart. They all exhibit the same behavior and operate under the same principles.
Wave Generation
After a measured move is completed, it becomes a matrix, the beginning of a larger measured move with this matrix as the first swing. The completed price record of a matrix built into a larger matrix is a Goodman Wave. See Figure 5.19.
Elliott versus GSCS For Elliott, a wave is composed of three components;
for Goodman, five components. See Figure 5.20.
The Return
In GSCS the return swing is the most critical part of the entire wave. See Figure 5.21.
The 4-swing in the propagation of a Goodman Wave is the return wave.
This is the wave that converts the first matrix into a single swing component of
The Measured Move
A B
C
D 150%
140%130%
120%110%
100%90%
80%70%
60%50%
40%30%
20%10%
0%
FIGURE 5.18 The Measured Move—A Matrix.
A matrix is the 3-wing measured move. It is nota Goodman Wave, which comprises five swings.
a Goodman Wave. If the 50 percent return of a matrix represents equilibrium of all traders in the 1-swing, the return represents equilibrium of all traders in the 1-2-3-swing matrix. Trading off the return is one of the three easiest and most reliable GSCS trades.
T h e C o d e x To o l b o x 87
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 260 270 280 290 300 310 320 330 340 0
1 2 3 4 5 6 7 8 9 10 11 12
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 260 270 280 290 300 310 320 330 340 0
1 2 3 4 5 6 7 8 9 10 11 12
1 2
3 4
5 1
2 3
4 c 5
c
e
e b
b
a
a d
d f
f FIGURE 5.19 Swing Matrix and Goodman Wave.
A Goodman Wave is a matrix taken as swing 1 as a component of a larger matrix. The 5-swing matrix is a Goodman Wave. The 4-swing is the critical return swing.
FIGURE 5.20 Goodman versus Elliott.
In Elliott Wave theory the 4-swing is a non-unique component of the 5-swing Elliott Wave. In GSCS the 4-swing is a unique component that propagates the first matrix into a Goodman Wave.
Chapter 05_[67-99].qxd 9/21/07 7:34 PM Page 87
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 260 270 280 290 300 310 320 330 340 0
1 2 3 4 5 6 7 8 9 10 11 12
FIGURE 5.21 The Return Swing.
Flat and Complex Rule
According to Goodman, if the first matrix is flat (a single swing), the second ma- trix will be complex, composed of three swings. If the first matrix is complex, the second matrix will be flat. This rule is extremely useful in anticipating the propa- gation of a Goodman Wave. (It is probably also why Elliott missed the fact that the 4-swing is a critical return swing and not just a non-unique component of a 1-2-3-4-5 swing.) Trading by anticipating the propagation of a Goodman Wave is the second of the three most useful GSCS trading patterns. See Figure 5.22.
The return and the flat/complex rule provide excellent trading oppor- tunities.