, Charles B. Goodman, used what he called bathtubanalysis. He would take a book of charts into the bath and analyzethem. By analyze he meant asking questions, making hypotheses,and testing them. If you don’t look for something, you can rarely ﬁndit. On the other hand, if you test for even the wildest hypotheses youwill often ﬁnd yourself hot on the trail of something very useful.Be sure to cover charts with a plain piece of paper and move itslowly to the right to duplicate the market as it happened.
All the major FOREX broker/dealer trading platforms offer customizable barcharts. 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. Mostof the charts in this book are from the Intellicharts FxTrek service, www.fxtrek.com.
Swing ChartsSwing charts were ﬁrst popularized by Burton Pugh in his 1933 book, TheGreat Wheat Secret. When I traded commodities, I used swing charts almost
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exclusively. Unfortunately, today they are not popular, so you will need to keepyour own if you decide to use them. If not, point and ﬁgure charts, more readily 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 entry and exit. The Goodman Swing Count System is the backbone of my trading method, FxCodex, and is detailed later in this chapter.Whereas bar charts are time-speciﬁc—that is, each unit is a unit oftime—most swing charts are price-speciﬁc (see Figure 5.11). Drawing them depends not on the passage of some ﬁxed time frame, but on the movement of aﬁxed price range. Point and ﬁgure charts are also price-speciﬁc. A price-speciﬁcchart requires a minimum price increment to build. A time-speciﬁc chart requires a speciﬁc time unit to build.Just as you must select the time frame for a bar chart, you must select aprice unit for a swing or point and ﬁgure chart. The smaller your price unit, themore detail the chart will display. Larger price units ﬁlter out the smaller movements. Such decisions will depend on what trader proﬁle you select. See Figures5.12 and 5.13.12
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FIGURE 5.11 Time- versus Price-Speciﬁc Charts.The bar chart on the left is time-speciﬁc; bars are drawn in accordance withspeciﬁc time units. The swing chart on the right is price-speciﬁc; swings aredrawn only in accordance with speciﬁc price changes.
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EURUSD Wed 9/15/04 07:30 to 10:00 AM ETP&F Chart Box Size – 0.0002 Rev Amt – 3 Boxes
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The rules for drawing a swing chart are simple:1. Select the minimum price reversal unit. This will be the minimumlength of any vertical swing.2. Draw your ﬁrst line up if prices are going higher, or down if prices aregoing lower. The ﬁrst line must be at least 100 percent of the value ofyour price reversal unit.3. Keep extending the line as long as prices move in that direction in anyadditional amount.4. As soon as the price reverses (down from up, or up from down) by thevalue of your minimum price reversal, draw a small horizontal lineand begin a second vertical line in the opposite direction.5. Repeat steps 3 and 4.Drawing a Swing Chart1. Determine a minimum price ﬂuctuation.2. Draw the ﬁrst trend (vertical line) in the same direction untilprices move in the opposite direction by your minimum priceﬂuctuation or more.3. Connect this trend to the next trend with a horizontal line overthe distance of one graph grid.4. Draw the second trend (vertical line) in the same direction untilprices move in the opposite direction (the ﬁrst trend) by yourminimum price ﬂuctuation or more.5. Continue steps 3 and 4.
My mentor, Charles B. Goodman, developed a time-speciﬁc swing chart.These are not available on any broker/dealer trading platform, so if they appealto you, it’s necessary for you to keep your own. In honor of Charlie, I call themCG charts.The CG swing chart begins with a small horizontal bar for the openingprice. You must know whether prices for a time period ﬁrst went up or ﬁrstwent down. The ﬁrst vertical line depicts this action. It is connected to a second horizontal line. The second vertical line depicts the opposite movement forthat time period. A ﬁnal horizontal line is drawn to show the last or closingprice for that time period. See Figure 5.14.I show you how to interpret and use swing charts in Part Three. I use barcharts for most steps of the trade selection process and swing charts for entryand exit.
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FIGURE 5.14 CG Charts.I recommend using a red horizontal line for the opening price and a greenhorizontal line for the closing price.
Drawing a CG Chart1. Use a horizontal bar for the opening.2. Draw a vertical line to either the high or the low for the timeunit, whichever occurred ﬁrst.3. Connect the ﬁrst trend to the second trend with a horizontal line.4. Draw a vertical line to the low or the high, whichever occurred last.5. Connect the second trend with the closing line with a horizontalline.6. Draw a vertical line to the close.7. Note the close with a horizontal line.
Goodman Swing Count SystemI learned this chart interpretation from Charles B. Goodman in the early1970s. Throughout the intervening years, I have continued to ﬁnd it the bestmethod for reading charts. It is simple, logical, and transparent. The basics canbe learned and applied quickly, but deep study is also possible.
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I believe the Goodman Swing Count System (GSCS) to be a vast improvement over both Gann and Elliott. It is certainly more logical and easy toapply. It also offers more predictive opportunities than either Gann or Elliott,which seem to me to be primarily descriptive in nature.The Goodman Swing Count System makes use of the refractive nature ofprice charts. Price charts in FOREX and other markets follow the same ruleswhether they detail a very short-term history (tick charts) or a very long-termhistory (monthly charts). Given a set of charts of different price histories, without a scale it is usually difﬁcult to tell which is a short-term record and which isa long-term record.This brief tutorial provides only an overview of GSCS and enough information to trade the easiest-to-recognize Goodman patterns. If you have furtherinterest in GSCS, you can visit my web site, www.fxpraxis.com, or refer to mybook The FOREX Chartist Companion.
GSCS ComponentsThere are three components to a Goodman chart: a trend or swing, a matrix,and a Goodman Wave. Swings build into matrices and matrices build intowaves. A Goodman Wave is a completed set of ﬁve swings of price; one matrixbecomes a component of a larger matrix—the wave.TrendA trend is a price movement over some period of time without a signiﬁcantcorrection (a price move in the direction opposite the trend). The operativeword here is significant. In Goodman, corrections of 25 percent of the trend orless are seldom signiﬁcant.In GSCS, a trend is called a swing. See Figure 5.15.Fifty Percent Move and Measured MoveThe cornerstone of GSCS is the old “50 percent retracement and measuredmove” rule. This rule, familiar to most traders, is almost as old as the organizedmarkets themselves. It has been traced to the times when insiders manipulatedrailroad stocks in the nineteenth century. See Figure 5.16.The ﬁrst systematic description of the 50 percent rule was given in Burton Pugh’s The Great Wheat Secret, originally published in 1933. In 1973,Charles L. Lindsay published Trident. This book did much (some say toomuch!) to quantify and mathematically describe the 50 percent rule. Nevertheless, it is must reading for anyone interested in this area of market methodology.Edward L. Dobson wrote The Trading Rule That Can Make You Rich in 1978.
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FIGURE 5.15 A Trend or Swing.In GSCS a trend or swing is simply a price movement in one direction withless than a 25 percent correction.
This is a good work with some nice examples. But none of these, in my opinion, 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, inbalance. Half of each holds proﬁts and half of each holds losses. See Figure 5.17.f
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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 exampleshown here is a Goodman Wave. In the author’s opinion it is the mosttradable pattern in all of the markets.
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Equilibrium of Buyers and Sellers
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FIGURE 5.17 A Market Tug of War.The 50 percent retracement is the price area to watch! It represents thepoint or area where buyers and sellers of the primary trend are in aggregateequilibrium.
This equilibrium is a tenuous one, indeed. The distribution of buyers andsellers over the initial price trend or swing is not perfectly even: Some buyers holdmore contracts than other buyers. They also have different propensities for takingproﬁts or losses. Nor does it account for the buyers and sellers who have enteredthe market before the initial swing or during the reaction swing. Not all of thebuyers and sellers from the original swing may be in the market any longer.Remarkably, GCSC eventually takes all of this into account—especiallythe buyers and sellers at other price swing levels, called matrices.Nevertheless, the 50 percent retracement point is often a powerful and veryreal point of equilibrium and certainly a known and deﬁned hot spot of whichthe trader should be aware. Remember that both the futures markets and the currency 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, itdoesn’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 initialswing. 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 pricelevels or matrices, and many are being worked simultaneously in any given
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The Measured Move
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ongoing market. This refractive behavior is a critical point. Simply stated, thismeans that without labeling, you could not really tell the difference between a10-minute chart and a daily or weekly chart. They all exhibit the same behaviorand operate under the same principles.Wave GenerationAfter a measured move is completed, it becomes a matrix, the beginning of alarger measured move with this matrix as the ﬁrst swing. The completed pricerecord 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 ReturnIn GSCS the return swing is the most critical part of the entire wave. SeeFigure 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
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FIGURE 5.19 Swing Matrix and Goodman Wave.A Goodman Wave is a matrix taken as swing 1 as a component of a largermatrix. The 5-swing matrix is a Goodman Wave. The 4-swing is the criticalreturn swing.fd4
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a Goodman Wave. If the 50 percent return of a matrix represents equilibriumof all traders in the 1-swing, the return represents equilibrium of all traders inthe 1-2-3-swing matrix. Trading off the return is one of the three easiest andmost reliable GSCS trades.
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Flat and Complex RuleAccording to Goodman, if the ﬁrst matrix is ﬂat (a single swing), the second matrix will be complex, composed of three swings. If the ﬁrst matrix is complex, thesecond matrix will be ﬂat. This rule is extremely useful in anticipating the propagation of a Goodman Wave. (It is probably also why Elliott missed the fact thatthe 4-swing is a critical return swing and not just a non-unique component of a1-2-3-4-5 swing.) Trading by anticipating the propagation of a Goodman Waveis the second of the three most useful GSCS trading patterns. See Figure 5.22.The return and the ﬂat/complex rule provide excellent trading opportunities.
Advanced Goodman RulesThere is much more to GSCS theory; a complete set of ordinal and cardinalrules can be applied. Ordinal rules refer to chart formations only, with no reference to speciﬁc prices or price measurements. Cardinal rules reference speciﬁcprice values and calculations. Previously, I have shown the ordinal rules. Following is a brief introduction to the cardinal rules.IntersectionIntersection is the most important and most interesting cardinal rule in GSCS.It refers to areas of price and time where two waves or matrices using the 50
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FIGURE 5.22 The Flat/Complex Rule.If the ﬁrst component of a Goodman Wave is simple (a single swing) thesecond component will usually be complex (a 1-2-3 swing or matrix). If theﬁrst component of a Goodman Wave is complex, the second component willusually be simple.
percent rule and measured move intersect. These are extremely reliable areas ofsupport and resistance, and it is useful to trade against these points or areas.The double intersection is the third and most reliable (but most difﬁcultto ﬁnd) of the three basic Goodman trading patterns, the ﬁrst two being the return swing and trading wave propagation. See Figure 5.23.
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There are several forms of double intersection. The most common is the50 percent return of a matrix being the measured move of another matrix. Thedouble intersection represents equilibrium at three points.The triple intersection is an advanced GSCS pattern. I do not recommend attempting to ﬁnd it or use it until you have mastered the three basicpatterns. (See Figure 5.24.) Traders should ﬁrst learn to see and anticipate wavepropagations, returns, and double intersections without regard to measurement(ordinal). After mastering those tasks, learn the cardinal measurement rules.Cancellation and CarryoverOften prices do not exactly hit the 50 percent retracement. The GoodmanSwing Count System states that whatever amount a matrix is short of or over the50 percent measurement, it will eventually make up in a subsequent matrix. The± value is carried over until it cancels and equals zero. See Figures 5.25 and 5.26.Brackets and PointsBrackets refer to price areas where different price matrices intersect. See Figure5.27. The brackets were a great mystery to traders when Charlie made them on
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the large wall charts at Peavey & Company. They essentially represent areas ofanticipated intersections and measurements. You always paid attention whenprices moved into areas where brackets overlapped.There are ﬁve key points that may be deﬁned relative to any swing. As theswing builds, these points will change. (See Figure 5.28.) The points of a swingfrom any initial swing can give the trader a rough idea of how and where aGoodman Wave may propagate. As possibilities are eliminated, one gets closerand closer to a trading candidate.
Trading GSCSGSCS may be traded in a number of ways, from various patterns and rules.The following four trade formations are the easiest to spot.1. The return. This is the easiest pattern to trade. It may be traded with orwithout measurement rules. At the end of the 4-swing in a GoodmanWave, even if the wave ultimately does not form, a sharp tradablemove is common in many markets. Trading off the return swing isidea for scalpers and day traders.
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2. Flat/complex rule. If the ﬁrst swing is ﬂat, you may anticipate thesecond swing in a Goodman Wave being complex and trade off theanticipated propagation of the complex swing. Guerillas may like thispattern since it occurs often on very small time frame charts.3. Double intersection. This can be traded without measurements, but withmeasurements it is the ﬁnest single trading pattern available. Look for asharp move in either direction off a double intersection. Remember, itrepresents equilibrium at the points. As the traders on the wrong sideunwind their positions, prices can and often do move sharply.4. Wave propagation. Anticipating a Goodman Wave may offer a numberof trades over a period of time. It is best for day traders and positiontraders. If you get in sync with a wave you may ride it for several profitable trades. But when the music stops, don’t ﬁght it—move on. Usethe ﬁve points of a Goodman Wave to initially map a wave.There is much more to GSCS theory, including a notational calculus and acharting technique. But these four trade formations are enough to keep anytrader busy for a long time. Even if you follow only a few markets at three different trading levels, you will ﬁnd multiple strategic opportunities every trading day.
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I could very well stop right here. With market environments and GSCS,you are already better armed to trade than most traders!
Goodman Cycle Count SystemI offer this section as an extra for experts, for those who want to do some independent exploration and research. It is a Goodman system for time, in contrastto GSCS, which is for price. Either Charlie didn’t have it fully developed or hesimply didn’t share the details with me. It took me 20 years after his passing (in1984) to reconstruct it from a few charts he left that used it.I use GSCS primarily and the Goodman Cycle Count System (GCCS) asonly a check or overlay to conﬁrm GSCS.Charlie had a counting system for cycles (time) as well as prices. He neverexplained it to me in depth, but I know he used it. The time points would beoverlaid on his price charts, I assume as a conﬁrming type of signal.Just as GSCS calculates price targets, GCCS calculates time targets. Theunion of these two targets is called a landing area.Although I have hundreds of Charlie’s price count charts, I was left only ahalf-dozen or so examples of the cycle count system. Through the years sincehis passing, I have taken those out on occasion and spent a few minutes looking at them, but until recently, I had never ﬁgured out the key to the cycle/timecount system.A few months ago I tried a new tack. It worked! As is often the case afterﬁguring something out, I wondered, “How did I miss this before?” In the caseof the cycle count, I had tried to make it more complex and less transparentthan it was and had misconstrued Charlie’s use of the word cycle. In this case, itis actually the same as a