If you review a large number of charts you will see many head and shoul- ders formations that worked. The problem is these patterns tend to be descrip- tive rather than predictive. To accurately measure reliability cover a chart with a plain piece of paper, then move it one frame at a time and attempt to predict a head and shoulders. Your results will differ substantially! Beware of tools that are descriptive (you can see them work after the fact) but are not predictive.
The codex approach does not use these patterns, but it is useful to be able to recognize them. In Part Three I show you how the codex trader uses them to their greatest effectiveness.
Another issue with traditional patterns is that because so many traders follow them, they simply cannot work. The market will not let them work or else everyone would win, which is impossible.
I once acted as an expert on an Internet FOREX forum. The moderator gave me the boot because my ideas about chart patterns were not mainstream.
But mainstream doesn’t win in the markets—stocks, futures, orFOREX.
In the old days, traders created their own bar charts by hand. This was very time consuming but it also had advantages. The very act of making the chart helped the trader tune in to the markets. Because you will be trading multiple markets with very short time frames this is, unfortunately, a luxury no longer affordable.
My mentor, Charles B. Goodman, used what he called bathtub analysis. He would take a book of charts into the bath and analyze them. By analyze he meant asking questions, making hypotheses, and testing them. If you don’t look for something, you can rarely find it. On the other hand, if you test for even the wildest hypotheses you will often find yourself hot on the trail of something very useful.
Be sure to cover charts with a plain piece of paper and move it slowly to the right to duplicate the market as it happened.
Bathtub Analysis
All the major FOREX broker/dealer trading platforms offer customizable bar charts. You can keep multiple charts on multiple pairs with multiple time frames!
This advantage easily surpasses any to be had from drawing your own charts. Most of the charts in this book are from the Intellicharts FxTrek service, www.fxtrek.com.
exclusively. Unfortunately, today they are not popular, so you will need to keep your own if you decide to use them. If not, point and figure charts, more read- ily available online, can be used as a satisfactory substitute.
The codex approach in general, and the Goodman Swing Count System (GSCS) specifically, both rely heavily on price swings, especially for timing en- try and exit. The Goodman Swing Count System is the backbone of my trad- ing method, FxCodex, and is detailed later in this chapter.
Whereas bar charts are time-specific—that is, each unit is a unit of time—most swing charts are price-specific (see Figure 5.11). Drawing them de- pends not on the passage of some fixed time frame, but on the movement of a fixed price range. Point and figure charts are also price-specific. A price-specific chart requires a minimum price increment to build. A time-specific chart re- quires a specific time unit to build.
Just as you must select the time frame for a bar chart, you must select a price unit for a swing or point and figure chart. The smaller your price unit, the more detail the chart will display. Larger price units filter out the smaller move- ments. Such decisions will depend on what trader profile you select. See Figures 5.12 and 5.13.
T h e C o d e x To o l b o x 79
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 5.11 Time- versus Price-Specific Charts.
The bar chart on the left is time-specific; bars are drawn in accordance with specific time units. The swing chart on the right is price-specific; swings are drawn only in accordance with specific price changes.
Chapter 05_[67-99].qxd 9/21/07 7:34 PM Page 79
1.2070 EURUSD Wednesday 07/28/2004 08:00-10:00 AM ET
1-Min OHLC. 3-Box Reverzal Swing Chart with 1-Min Activity
1.2065 1.2060 1.2055 1.2050 1.2045 1.2040 1.2035 1.2030 1.2025 1.2020 1.2015 1.2010 1.2005 1.2000 200150 100 50 0
FIGURE 5.12 A Swing Chart.
1.2246 1.2244 1.2242 1.2240 1.2238 1.2236 1.2234 1.2232 1.2230 1.2228 1.2226 1.2224 1.2222 1.2220 1.2218 1.2216 1.2214 1.2212 1.2210 1.2208 1.2206 1.2204 1.2202 1.2200 1.2198 1.2196 1.2194 1.2192 1.2190 1.2186 1.2184 1.2182 1.2180 1.2176 1.2178 1.2188
EURUSD Wed 9/15/04 07:30 to 10:00 AM ET P&F Chart Box Size – 0.0002 Rev Amt – 3 Boxes
FIGURE 5.13 A Point and Figure Chart.
The rules for drawing a swing chart are simple:
1. Select the minimum price reversal unit. This will be the minimum length of any vertical swing.
2. Draw your first line upif prices are going higher, or downif prices are going lower. The first line must be at least 100 percent of the value of your price reversal unit.
3. Keep extending the line as long as prices move in that direction in any additional amount.
4. As soon as the price reverses (down from up, or up from down) by the value of your minimum price reversal, draw a small horizontal line and begin a second vertical line in the opposite direction.
5. Repeat steps 3 and 4.
T h e C o d e x To o l b o x 81
1.Determine a minimum price fluctuation.
2.Draw the first trend (vertical line) in the same direction until prices move in the opposite direction by your minimum price fluctuation or more.
3.Connect this trend to the next trend with a horizontal line over the distance of one graph grid.
4.Draw the second trend (vertical line) in the same direction until prices move in the opposite direction (the first trend) by your minimum price fluctuation or more.
5.Continue steps 3 and 4.
Drawing a Swing Chart
My mentor, Charles B. Goodman, developed a time-specific swing chart.
These are not available on any broker/dealer trading platform, so if they appeal to you, it’s necessary for you to keep your own. In honor of Charlie, I call them CG charts.
The CG swing chart begins with a small horizontal bar for the opening price. You must know whether prices for a time period first went up or first went down. The first vertical line depicts this action. It is connected to a sec- ond horizontal line. The second vertical line depicts the opposite movement for that time period. A final horizontal line is drawn to show the last or closing price for that time period. See Figure 5.14.
I show you how to interpret and use swing charts in Part Three. I use bar charts for most steps of the trade selection process and swing charts for entry and exit.
Chapter 05_[67-99].qxd 9/21/07 7:34 PM Page 81