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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 10-

minute 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


duane@goodmanworks.com