Goodman Wave

A Brief Introduction to Goodman Wave Theory (GWT) By Michael Duane Archer

Introduction

I was introduced to Goodman Wave Theory in 1973 by Charles B. Goodman. Mr. Goodman mentored me on his trading theories until the time of his passing in 1984. He developed two theories, 1) Goodman Wave Theory (GWT) comprising the Goodman Swing Count System (GSCS) and the Goodman Cycle Count System (GCCS) and 2) Market Environments (ME). He used them effectively in commodity futures from the 1940s to the 1970s. I have further developed his work, codifying much of it. I have written very complex computer trading programs including Jonathan’s Wave a successful expert system and The Trend Machine a cellular-automata based forecasting model. But GSCS, GCCS and ME are still my ‘go-to’ trading method. I have used then successfully in stocks, futures and FOREX. In this brief primer I will explain the basics of GSCS, the price-based component of Goodman Wave Theory, as well as two of its most important – and reliable – chart patterns and briefly introduce GCCS.

The 50% Return and the Measured Move

The 50% return and the measured move have been around for a long time. GSCS starts with these two simple ideas and builds a complete trading approach from them.

The 50% Rule simply states prices will find support or resistance at the 50% retracement of a price swing. The logic is easy enough to understand. At the 50% point all the buyers and sellers in the swing are – in the aggregate – even. Half of the buyers and half of the sellers have profits; half of the buyers and half of the sellers have loses. Mr. Goodman taught me the importance of being able to detect the underlying logic in any chart formation or indicator tool I studied and contemplated using.

In GSCS a ‘swing’ is a price trend with less than a 25% retracement.

The line on the left is a single swing; the line on the right is composed of multiple swings

When these buyers and sellers unwind, it will create a measured move, at which price point either all of the buyers have profits and all of the sellers have losses (up swing) or all of the sellers have profits and all of the buyers have losses (down swing).

In GWT this 1-2-3 is the basic building block and is called a matrix. A Matrix is composed of a First Primary Swing (FPS), a Secondary Swing (SS) and a Second Primary Swing (SPS).

Matrix Propagation

Matrices are said to propagate. Once a matrix is formed it has the potential to become a ‘1’ in a larger 1-2-3.

A 1-2-3 Matrix automatically becomes a ‘1’ to a larger 1-2-3 Matrix.

In GSCS every matrix is composed of smaller matrices and every matrix is itself part of a larger matrix. Looking at it from the largest to the smallest, matrices are ‘nested’ in larger matrices. Looking from the smallest to the largest, matrices are said to ‘propagate’ to larger and larger matrices. When you analyze a market you analyze the nesting. When you forecast a model, you carry through the nesting to propagation.

In GSCS a propagated matrix is a Goodman Wave. Note a very common and useful trait of Goodman Wave: If primary swing ‘1’ is itself a 1-2-3, then primary swing ‘2’ will usually be a simple swing with not secondary components. If primary swing ‘1’ is a simple swing with no secondary retracement, primary swing ‘2’ will usually be a 1-2-3. This is actually called the Flat-Complex Principle.

Goodman versus Elliott

As I am sure you have concluded GSCS has some commonality with Elliott Wave Theory. But, there are quite a few differences. The most important of these is that GSCS sees a 1-2-3 as the primary building block whereas Elliott sees a 1-2-3-4-5 as primary.

(The other most critical are: The 3-C Rule and Intersections.)

This is not simply syntax. Since matrices propagate there is a key difference in the ‘4’ swing.

In Elliott the ‘4’ swing is related to the ‘3’ swing. In GSCS the ‘4’ swing is the beginning of a propagation and is related to the entire 1-2-3 matrix.

In GSCS the ‘4’ swing is called the Return or Return Swing.

If you have studied Elliott you may have discovered that problems – usually resulting in multiple forecasts – begin with that key ‘4’ swing. The reason for this, according to GSCS theory, is that the ‘4’ is not related to just ‘3’ but to the entire ‘1-2-3’ which has become a ‘1’ in propagation.

A propagated Goodman Wave or G-Wave.

Goodman Points

There are five primary Points to every swing in GSCS (and there are parallel points in time in GCCS). These are the key support/resistance and reversal points. Since they hold for every swing, a chart may have 15 or more points depending on how many swings (or matrices) you are watching. When points cluster together or Intersect it indicates even stronger support or resistance.

The Five Points: ONE - The 50% Return or TP, TWO -The Beginning BP, THREE The End or EP, FOUR - The measured move assuming the swing is a primary swing or MP and FIVE - The measured move assuming the swing is a secondary swing.

In GSCS an Intersection is a price where the points of two or more matrices meet.

The 3-C Rule

A second difference between Elliott and the Goodman Swing Count System – the latter provides a built-in counting scheme to make forecasts more accurate and, critically, to cut down on the number of possible forecasts.

3-C stands for Compensation, Carryover and Cancellation.

In the years I have mentored traders on GSCS, the 3-C Rule is the most fascinating. Traders like numbers; they imply certainty. But the 3-C Rule is the most complex of all GSCS and should be learned last. I include it here just to give you a general idea of how it operates.

The basic 3-C rule: In GSCS if prices miss the 50% retracement, either by going too far or not far enough, that amount will be made up on the next swing. Prices will be over or under the measured move by that amount. The logic is similar to that of the measured move: any imbalance will need to be compensated.

In GSCS prices will compensate for missing the 50% retracement. That amount will carry over until it cancels.

The 3-C Rule is amazingly accurate – and useful as a forecasting tool! BUT: Do not attempt to apply the 3-C Rule until you are familiar with the other ‘Ordinal’ Rules that do not require counting or calculation!

Trading the Return

The Return point is an excellent place to look for long term entry into a market or make a short term trade. It is very often a place of strong resistance or support. As a bonus it is typically not at an area where other traders will be expecting resistance or support. Elliott traders are often confounded because their ‘4’ doesn’t behave correctly.

The Return is easy to spot. It is the ‘2’ swing when a smaller ‘1-2-3’ matrix has become a ‘1’ in a propagated matrix or Goodman Wave.

Here are some examples from my own praxis.

Source: FXtrek, IntelliChart™ - Copyright 2001-2009 FXtrek.com, Inc.

Source: FXtrek, IntelliChart™ - Copyright 2001-2009 FXtrek.com, Inc.

Source: FXtrek, IntelliChart™ - Copyright 2001-2009 FXtrek.com, Inc.

Trading the Double Intersection

A third GSCS difference over Elliott Wave Theory: The end points of one Matrix and the 50% points of another Matrix or swing will often intersect. This provides a confirmation tool which, again, eliminates multiple forecast possibilities and indicates the remaining forecast is stronger.

In GSCS a Double Intersection is a price point where end points or 50% points of two matrices or a matrix and a swing meet at the same price.

Similar to the Return, Double Intersections may be used as entry points or to catch short term trades. Most valuable: They may be used as precision points to ride a trend, or in GSCS terminology, follow a Goodman Wave as it propagates.

Source: FXtrek, IntelliChart™ - Copyright 2001-2009 FXtrek.com, Inc.

Source: FXtrek, IntelliChart™ - Copyright 2001-2009 FXtrek.com, Inc.

Source: FXtrek, IntelliChart™ - Copyright 2001-2009 FXtrek.com, Inc.

Trading Goodman

The goal of trading Goodman is to locate where prices are currently in the G-Wave propagation with as high percentage accuracy as possible. Then, enter the market and ‘ride’ the propagation as long as possible.

Intersections are a sub-set of Overlays; the GWT methodology used to increase the percentage accuracy of your positioning.

There are six primary combinations of Intersections. These are called the Goodman Templates.

Charting Goodman

To follow multiple matrices you may use a single small time frame chart, such as a 10minute chart and dissect the various matrix levels. But most traders find it easier to locate different matrices on different time scale charts. Three seems to be the practical limit for most traders. For example: a 15-minute to find the smallest matrices, a 1-hour to find mid-range matrices and a 4-hour to find the largest matrices. What charts you use are of course determined by what type of trades you seek. Unfortunately there is not a perfect one-to-one correspondence between matrices and time-frames; they overlap.

Since bar charts are time-sensitive and GSCS is only price-sensitive, the trader may consider using price-only point and figure charts to bring out the various swings and matrices more clearly. Charlie used Box Charts which allow multiple time-frames to be viewed on a single chart as a combined time and price based chart.

The Goodman Cycle Count Theory (GCCS)

GSCS is a price-based method. Mr. Goodman developed the Goodman Cycle Count System, a parallel time-based method. Whereas GSCS gives vertical price ranges for

points and intersections, GCCS generates horizontal time ranges. Together they form small price-time boxes on a chart which we christened landing areas showing where prices should move (GSCS) and in what time frame they should arrive (GCCS).

In this example the Red lines refer to standard GSCS price counts. The Green lines refer to GCCS time counts. I will leave it to the ready to map the principles of GSCS (price) to GCCS (time). While not identical, they are similar with one or two exceptions.

GCCS forecasts in time are said to be overlaid on the GSCS forecasts in price.

Conclusion

No technical analysis method works in all situations. At best, GWT is a more accurate way to analyze swing movements than Elliott; at worst, it offers an alternative and complementary tool for the Elliott trader.

The Goodman Wave Theory is logical, transparent and easy to apply. It is a comprehensive trading approach built, Spinozan-like, from two intuitive ideas or axioms – the 50% rule and the measured move. A detailed exposition is available in the Goodman Codex, the Trading Goodman Mentoring Course and the GoodmanWorks Blog.

Shorter expositions are available in 15 Essential FOREX Trades by Michael Archer, John Bland and Jay Miesler (John Wiley & Sons 2009) and Getting Started in Currency Trading, Third Edition, by Michael Archer (John Wiley & Sons 2010).

Nevertheless, you now have enough to work with it and decide if it complements your own approach to FOREX trading.

Begin working with Goodman Wave Theory with GSCS. Identify 1-2-3 matrices, and then watch for propagations of G-Waves. From there, locate Returns and Double Intersections. Keep a catalog of Matrices, Goodman Waves, Returns and Double Intersections. See how they play out in real-time trading. For there, apply the 3-C Rule as an overlay to increase accuracy.

Michael Duane Archer [email protected]

Goodman Chart Study #1

I recommend everyone read the Goodman Overview article before any of the Chart Study Series. For further research of relevance to GSCS I recommend: Bertram Pugh – The Great Wheat Secret, Edward Dobson – The Trading Rule That Can Make You Rich, Charles Lindsay – Trident and Archer/Bickford – The Swing Trader’s Companion.

Chart Study #1 - Chart Courtesy of www.FxTrek.com This ‘textbook’ Goodman Wave from EUR/USD trading early this month G [1-2-3-4-56] gives us an opportunity to introduce a number of Goodman topics and ideas via a brief Tour de Force of the entire System. Notation

We’ll learn a more precise Goodman Notation later, but for now: The end-points of a Matrix (‘M’) are denoted by 1-2-3-4. Going in to smaller Matrices, iii-iii-iv. Going out to a larger Matrix, A-B-C-D. All Matrices are denoted as ‘M’. The notation is M(1-2-3-4) using parentheses. A Wave is denoted by 1-2-3-4-5-6 (points of the Wave). Going in to smaller Waves, i-iiiii-iv-v-vi. Going out to larger Matrices, A-B-C-D-E-F-G. All Waves are denoted as ‘G’. The notation is G[1-2-3-4-5-6] using brackets. A Matrix always has Three components; of course a component may also itself be a matrix. A Goodman Wave has Five components at least for the purposes of notation. A Matrix or Wave SEGMENT or COMPONENT is thus M(1-2) or G[3-4-5-6]. Here are the definitions and topics we’ll explore this time: Notation, Matrix, The Goodman Wave,Generation and Propagation, Simple/Complex, Fat/Thin and Component/Segment. Matrix A MATRIX is a simple 1-2-3 swing (3 components or segments). It may or may not have smaller MATRICES as on of its components. A MATRIX is either SIMPLE (no components) or COMPLEX (if it has components). M(1-2-3-4)

Diagram A -Example of a Matrix A GOODMAN WAVE is the PROPAGATION or GENERATION of a COMPLEX MATRIX in a specific manner and of a specific form. G[1-2-3-4-5-6]

Charlie’s concept of how matrices propagate is different from Elliott. Once you start looking for them, finding them and analyzing them you will quickly realize how much more they confirm to the real structure of the markets and – more importantly – how much more easily they may be traded. The propagation concept more accurately reflects the dynamic of markets than does a static wave concept. Goodman Waves are relatively easy to spot after they are built, or as part of a larger Wave. But what we are most interested in – from the point of view of TRADING – is the Propagation of a Goodman Wave.

Propagation of a Goodman Wave: 1) Any Goodman Wave obviously begins with a Segment S(1-2). The questions becomes – and this is why the concept of Propagation is important – Does the wave develop as a Flat Segment followed by a Complex Matrix – or visa versa. According to GSCS theory this segment or matrix now becomes the first component of a Goodman Wave and is thereafter treated as a single SEGMENT or COMPONENT for purposes of analysis. 2) We now look for a 50% secondary component retracement of the entire complex matrix or segment. On this Chart Study this is Segment S(4-5). This component could easily be mistaken for a simple wave in a 5-Wave Elliott, but it is not. In Goodman it is the key ‘Return’ or ‘Propagation’ segment. 3) Finally we look for a component or matrix in the primary direction with a magnitude equal to the first component. Diagram B1 and B2 – Examples of a Goodman Wave (Note the Return or Propagation Wave in RED)

THESE 4 WAVE FORMATIONS (TEMPLATES) ARE – TRULY – ALL YOU REALLY NEED TO KNOW ABOUT THE MARKETS AND ALL YOU REALLY NEED TO LOOK FOR IN YOUR TRADING!! The Four Primary Goodman Waves occur everyday, over and over again, in all markets – Forex, Futures and Securities – and at all price levels. The Wave is the foundation and basis of trading GSCS. The opportunities to trade it are only limited by your time to seek them out in the markets that most interest you. Forget trading stations with 5 monitors, forget Specialist short sales, forget complex volume and open interest calculations, forget Gann charts with 50 lines on them all leading to nowhere and Fibonacci charts with numbers carried out to 14 significant places. Look for these 4 Goodman Wave types. Learn everything you can about them; find them, study them, catalog them. Learn how to template and anticipate them.

Elliott mistakenly identified this as a 5-component wave. This is not accurate or precise. What is occurring is a 3-component matrix is propagating in accordance with the 50% rule. It is NOT strictly a 5 component Wave but rather a MATRIX in generation or propagation. This propagation is critical and fundamental to GSCS.

Simple/Complex Note: From a ‘Matrix Point of View’ two of the four Goodman Wave appears to be a Simple/Complex matrix followed by a Complex/Simple matrix. It is important to think only in terms of the FOUR GOODMAN WAVE TYPES showing in Diagrams B1 and B2. By thinking in terms of Propagation you will better anticipate the unfolding of the market through time. For now just drill into memory the Four Goodman Wave Types. Keep in mind – at least theoretically – Goodman Waves propagate inward and outward. Meaning, every Wave is composed of smaller Waves and every Wave is a component of a larger Wave. The same is true of Matrices. Fat/Thin Note that in the complex matrix of Chart Study #1 the first Matrix is FAT and the second is THIN; this is another important alternating structure that assists in templating and trading. By FAT I mean there is a lot of back-and-fro motion (volatility) as prices move up or down (directional movement). By THIN I mean there is little such motion.

FAT component from Mid-Jul to Early-Sep; Thin from Early Oct-Late Nov Technically ‘Directional Movement’ and ‘Volatility’ can be easily quantified.

A Goodmanism. I remember eagerly calculating Wilder’s Relative Strength Index when it first came out. Charlie didn’t believe in quantifying anything if it wasn’t totally necessary (although he had a degree in Math and Statistics). It took him less than two minutes to realize the indicator was nothing but a form of the old algebraic slope-intercept formula measuring the slope of a line. He took a chart and below it – without doing Wilder’s calculations – drew a very accurate RSI for it! “It’s useful information” he said. “But not that useful and I can see it from the chart anyway. All it really does is break your concentration.”

Diagram C – Fat/Thin

The rhythm of the market is much determined by the Fatness and Thinness of price action. Rhythm can also give us important clues to Templating. In GSCS Templating is the nexus of theory and practice. One of the simplest yet most effective ways of seeing a market’s rhythm when looking at a chart is take an average value for the duration of primary swings and reaction swings. Sometimes the Fatness is simply noise that can be filtered out of analysis – but sometimes it represents significant internal matrices and demands deeper analysis.

Two Final Goodman Wave examples. Stay focused on the Ordinal movement; we will overlay the Cardinal Rules as we move forward. Note the important ‘Return’ swing.

Chart Courtesy of www.fxtrek.com

Chart Courtesy of www.oanda.com I will discuss other introductory ideas next time: Counting and Brackets, Templating, Intersection and The Return. The third Overview will discuss Ordinal versus Cardinal, The Goodman Knot and trading tactics.

Duane Archer [email protected]

Goodman Swing Count System Chart Study #2-1 Counting and Intersection Terms this time: Counting, Carry Over, Cancellation, Brackets, Double Intersection, Triple Intersection. Counting. I think the counting method in Goodman is what initially fascinates people. It did me! But 1) Its important NOT to over emphasize it and 2) Learn the Ordinal principles first. Learn to find the key Return component, catalog and index as many matrices and Goodman Waves as possible before going too far into the Cardinal realm – it can be a bit of a brain bender! Cardinal versus Ordinal. By Ordinal I mean formations and swings without reference to counting or measurements. Cardinal – including counting and measurements. I believe a trader could be successful with Goodman strictly using the Ordinal Rules and especially the Return Formation. The Return component is a critical difference between Goodman and Elliott from a theoretical perspective. The Counting Principle is based on the 50% Rule. Here it is in a nutshell: 1) A Matrix or Wave will retrace 50% of its entire measurement.

(Example 1)

2) The Ideal matrix will then make a 3rd component of equal value to the 1st component.

(Example 2) 3) Whatever the Count is Over or Under on a measured move – It will carry over to the next Matrix measurement, and the next, until it Cancels. Counts are made from the 50% point on the chart.

(Example 3) The area from Under to Over is marked with a right hand bracket. These brackets are the ‘mysterious hieroglyphics that Charlie put on the massive charts at the Peavey office. There is a Secondary method of Counting that I will explain some other time; the Primary method works best 90% of the time, I’ve found. Tactically, you must keep a ‘running count’ as the market unfolds. I’ve found this a little easier using Goodman Notation and G-Chart than trying to follow real-time charts. Any absolute value amount ‘left over’ is what must be ‘carried over’ until the result is Zero. For example if there is a carryover of ‘3’ and on the next swing ‘1’ is satisfied (in absolute value terms) then the remaining carryover is ‘2’. I will discuss Carryover and Cancellation a bit more in GMDB #2-2.

Interesection This is the most useful and reliable of all Goodman cardinal formations. Between this and the Ordinal Return I HAVE FOUND NOTHING BETTER chart formations in 35 years of searching. A Double Intersection is when the measurements of TWO matrices intersect at the same price point (or bracket range). A Triple Intersection is when THREE matrices intersect at the same price point or range.

(Example 4) The final end-point @ ‘6’ is the intersection of 50% retracement of the primary matrix and a full count measurement of the secondary matrix. It’s possible, but not really practical, to go further than a Triple. The Intersection is the major (but not only) distinction between Elliott and Goodman – at least from a trading and tactical point of view. The Intersection is a hard-and-fast point/range from which you can calibrate your trading compass.

Goodman and Computers The question arises: Is GSCS programmable? The answer is: probably. I’ve done a short software ‘demo’ that captures a small part of the process. (Please just ask if you’d like a copy). But it would be a fairly substantial programming project and at least for me goes very much against the grain of what Charlie had in mind. A smaller program that would just look for Intersections (perhaps in TradeStation format) would not be too difficult and I have entertained doing that project. Here is a dandy chart from Forex trading in 2004. Sometimes, as they say, you can ‘play it like a violin’. A fine chart example for exploring cancellation and carryover. Duane Archer [email protected]