Forex Trading System- Ordinal Principles

ORDINAL VERSUS CARDINAL

Within the context of this book, ordinal refers to measurement without specific values;
cardinal refers to measurement with specific values.
THE MEASURED MOVE

The cornerstone of the Goodman Swing Count System (GSCS) is the old “50 Percent
Retracement and Measured Move” rule (“The Rule”). (See Figure 35.1.) This rule, fa-
miliar to most traders, is almost as old as the organized markets themselves. It has
been traced to the times when insiders manipulated railroad stocks in the nineteenth
century.

The first systematic description of The Rule was given in Burton Pugh’s The
Great Wheat Secret, originally published in 1933. In 1976, Charles L. Lindsay’s Tri-
dentwas published. This book did much—some say too much!—to quantify and
mathematically describe The Rule. Nevertheless, it is must reading for anyone inter-
ested in this area of market methodology. Edward L. Dobson wrote The Trading Rule
That Can Make You Rich in 1978. This is a good work with some nice examples. But
none of these, in my humble opinion, even scratches the surface relative to Goodman’s
work.

CONGESTION PHASE

In 1975 a well-known Chicago grain floor trader, Eugene Nofri, published Success in
Commodities: The Congestion Phase System. This small but power-packed volume
detailed a short-term trading method using simple but effective congestion phases.
(See Figure 35.2.) While not precisely a work on The Rule, it touched on some of
Charlie’s ideas from a different angle.
I mention Nofri’s work also because Charlie was especially taken by its simplic-
ity and because it can work well in conjunction with the GCSC. The idea of melding
the GCSC with a congestion phase approach ought to produce a method of finding
those high-percentage ducks that the Belgian dentist loves so much. Charlie also felt
that Earl Hadady’s work on contrary opinion was a natural fit, especially since the
GCSC support and resistance points seldom lie where anyone else thinks they
should.
Still, in the end, it was left for Charles B. Goodman, the great grain trader from
Eads, Colorado, to extract all the logical consequences from The Rule and transform it
into a robust, almost geometrically precise system.

EQUILIBRIUM OF BUYERS AND SELLERS

The logic of The Rule is quite simple. At a 50 percent retracement, both buyers and sell-
ers of the previous trend (up or down) are ceteris paribus in balance. Half of each holds
profits and half of each holds losses. (See Figure 35.3.)
The equilibrium is a tenuous one, indeed. The distribution of buyers and sellers over
the initial price trend or swing is obviously not perfectly even: Some buyers hold more
contracts than other buyers. They also have different propensities for taking profits or
losses. Nor does it account for the buyers and sellers who have entered the market be-
fore the initial swing or during the reaction swing. Not all of the buyers and sellers from
the original swing may be in the market any longer.
Remarkably, GCSC eventually takes all of this into account—especially the buyers
and sellers at other price swing levels, called matrices.
Nevertheless, the 50 percent retracement point isoften a powerful and very real
point of equilibrium and certainly a known and defined hot spot of which one 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 it doesn’t take much to shift the balance of
power for that particular swing matrix.

The Rule also states that the final (third) swing of the move—again in the direction
of the initial swing—will equal the value of the initial swing. The logic of this idea, called
the measured move, is seen in Figure 35.4.
Examples of The Rule occur at allprice levels or matrices, and many are being
worked simultaneously in any given ongoing market. This is a critical point. In modern
terminology it would be said that price movements are recursive. Simply stated, this
means that without labeling you could not really tell the difference between a 10-minute
chart and a daily or weekly chart—they all exhibit the same behavior and operate under
the same principles of parameter and matrix. The bar graphs in Figure 35.5 were taken
from actual market data. It is functionally impossible to tell the time units apart with re-
spect to the chart action.