Forex Trading System- Cardinal Principles

OVERVIEW

Now we can begin to informally define six of the seven concepts in The Rule that
Mr. Goodman used to construct the Goodman Swing Count System (GCSC). What
had been neglected by previous theorists, users, writers, and purveyors of the rule
was this:
The 50 percent point is indeed an equilibrium point. As such, the equilibrium must
give way, but either side (buyers or sellers) in either a downtrend or an uptrend may
prevail at any given matrix or price level.
PRICE SURGE

Goodman realized both the possibilities for a reversal (as in the case of the completed
measured move) and a price surge. A price surge would be equivalent to the sellers (in
an uptrend) and the buyers (in a downtrend) winning the tug-of-war within a matrix. In
price action this means prices would fall or rise to at least the beginning point of the ini-
tial swing.
In other words, the measured move is not a done deal—the 50 percent retrace-
ment in Figure 36.1 could also become a V or an inverted V. The 50 percent retrace-
ment is not necessarily a reversal point but should be considered as a point of
interest where prices may be more likely than randomlyto decide whether to con-
tinue or reverse.
It may not sound like much, but it is a major discovery.

Clearly price surges are implicit in The Rule. But they are not visible on a chart un-
less you are looking for them and unless you are considering the 50 percent retracement
as a point of interest and not necessarily a reversal. In fact, most practitioners perceive
a price surge as a failure of The Rule!
MULTILEVEL MATRICES

What was even more important, Goodman discovered the implications of The
Rule occurring simultaneously at all price levels. I remember exactly the day and
place when Charlie showed me this one—it hit me as truly a grand revelation on the
markets!
Here you are: The initial (primary) trend and secondary (reaction trend) as well as
reversals (measured moves) and surges are relative to price matrix context. What is one
thing in one price matrix may well be its opposite in a higher (or lower) matrix. (See
Figure 36.2.)

It is true that Elliott wave theory contains the same concept. But with GCSC you
can tell before (in many instances) which it is. In Elliott you can tell only after. GCSC is
a predictive system, whereas Elliott wave theory, grand and elegant as it is, is primarily
a descriptive system.
All price matrices are in theory part of a larger price matrix.
All price matrices are composed of smaller price matrices.
Of course there is the practical limitation of the smallest possible fluctuation.
Besides reversals and surges, GCSC matrix concepts include domination and
generation.
Clearly, prices do not always seem to find any kind of equilibrium at the 50
percent retracement price area. Or so it may seem. This leads to the third grand
discovery:
To the extent a price swing overshoots or undershoots its ideal 50 percent
retracement, that price value will be made up on the next price swing within the
matrix.
Now this is the trading rule that can make you rich!

COMPENSATION

For example, if prices fall only 40 percent of the initial trend and reverse, the mea-
sured move will actually be either 90 percent or 110 percent of the measured move
point and value of the primary (initial) swing in the matrix. The 10 percent differ-
ence—GCSC holds—must be made up eventually. This is the concept of compensa-
tion. See Figure 36.3.
CARRYOVER

Furthermore, if the difference is not fully made up in the final price swing of a matrix,
the cumulative “miss” value will carry over through each subsequent price matrix until
it does. This is the concept of carryover. (See Figure 36.4.) A carryover table is used to
add and subtract cumulative carryover values until they cancel.

CANCELLATION

When no carryover remains, the price matrix is said to have cleared or cancelled.
This is the GCSC concept of cancellation. Cancellation is critical to finding GCSC
support and resistance points. These price areas or points indicate a higher degree of
forecasting probability than would occur with a single matrix measurement. (See
Figure 36.5.)
The exact method for these important concepts is more fully described in the fol-
lowing chapter. We can now get an early glimpse of what the strange brackets in
Charlie’s charts were all about. (See Figure 36.6 for an example.) The brackets indi-
cate the measured area on a chart where prices have a higher degree of moving con-
clusively. The more bracketed areas surrounding a price, the higher the probability of
forecasting.
The five points are: the beginning of the swing, the 50 percent measurement of the
swing, the end of the swing, the measured move if the swing is a primary wave, and the
end of the measured move if the swing is a secondary wave.

INTERSECTIONS

Charlie had even more ideas:
The importance of a hot spot in relation to its likelihood of being an important point
of support or resistance, reversal, or continuation, increases when two or more price
matrices cancel at the same price or same price area. This is the key concept of inter-
section. There is no analogous concept in Elliott, the most common competitor to
GSCS. Intersection makes GSCS much more objective and testable than other swing
systems. (See Figure 36.7.)
This chapter has covered micro formations. Charlie also had compiled a dozen or so
extremely valuable macro formations—combinations of micros. I encourage the reader
to examine some charts and find simple areas of the intersection of two (or three) ma-
trices. You will see at once that these points are golden to the trader. If I had after 30
years of studying the markets only one idea to impart, it would be to show you an exam-
ple of a GSCS intersection in two or three matrices.
Remember, carryover is to the same or next larger price matrix. The above are ex-
amples of independent intersections. That is, each price level carryover calculation is
kept separate from the others and tallied at the end of each matrix. Charlie had also de-

FIVE POINTS OF A GOODMAN WAVE

Here is another perspective to help you analyze a chart and understand GSCS. Given
any component or matrix, there are five points worth watching. Remember, these points
are constantly changing as the market develops.
The five points are: the 50 percent return, the top/bottom, the bottom/top, the mea-
sured move assuming the matrix or component is in the primary direction, and the mea-
sured move assuming the matrix or component is in the secondary direction. (See
Figure 36.8.)
Sometimes it is easier to watch the points instead of totally focusing on the chart as
it develops.

DOUBLE AND TRIPLE INTERSECTIONS

The two key cardinal formations in GSCS are the double intersection and the triple in-
tersection. These represent (respectively) the intersection of two and three matrix
measurements.
The strong support and resistance at these areas may be used to enter the market in
the direction of the dominant wave. (See Figure 36.9.)