The Propagation Trade Setup

In this article and The Dagger, the Waltz, and the Line, I show the Goodman Method at work using one of the most popular formations in Goodman Wave Theory (GWT), the propagation trade setup, or PTS. This walkthrough will allow you to learn not only a practical application of GWT that is easy to apply, but see the Goodman techniques and concepts for money management in action as well.

Goodman Wave Theory offers three trade setups. The return setup is easy to learn and master.

It is an ideal complement with other trading methods. The Goodman 3-D setup uses all aspects of GWT. It can be very precise, but takes considerable time to learn and apply correctly. The propagation trade setup sits between the return and 3-D. It is relatively easy to master, the formation is plentiful at all time frames, and the serious student can dig very deep into it.

The PTS

The propagation trade setup has proven to be the most popular setup for most Goodman traders.

While the PTS accesses the three primary principles of Goodman Wave Theory, propagation, intersection, and 3-C, it relies most heavily on the principle of propagation.


PTS Time Frames

Tip: Thus far, you have been working with only a single time frame. The PTS will give you an idea of how analysis of multiple time frames for the same currency pair is accomplished.

Three time frames are used for the propagation trade setup. Do not worry, most of the work is done on the time frame you have selected as your trading space or profile:
  1. A time frame to locate the Jumbo swing and do outward analysis
  2. A time frame to locate and track the PTS and establish S/L and T/P
  3. A time frame to locate an entry

The PTS time frame should be the middle of the three. The Jumbo may be the PTS chart or a higher time frame. The chart for outward analysis is also the higher time frame. For the entry, use a time frame lower than where you found the PTS. There is not a perfect one-to-one correspondence between matrixes and time frames; ergo, some flexibility is suggested.

Suggested settings for different trading profiles:

Day Trader
Guerilla Trader
Position Trader

A PTS Walkthrough in the AUD/USD

The best way to learn how to find a PTS is by walking through one as it forms. The Goodman Method, and therefore the associated tracking log, uses stages to follow the progress of potential trade candidates.

STEP 1—The Jumbo Swing

Watch for a long, sustained uptrend or downtrend. This may be in a single long swing, or line, or it may be composed of several smaller swings trending in the same direction. In general, the former seem a little more reliable but both may work very well. The bottom point (EP) of this Jumbo is the starting point for the PTS to form. See Figure below.

[caption id="attachment_13213" align="aligncenter" width="550"]PTS—The Jumbo Swing PTS—The Jumbo Swing[/caption]

(The black circle is for a reference as we move to different time frames in the walkthrough.)

STEP 2—The Bounce 1 Swing

Watch for prices to bounce sharply in the opposite direction of the Jumbo swing. You would look for this on your PTS time frame chart. See Figure below.

[caption id="attachment_13214" align="aligncenter" width="550"]PTS—The Bounce 1 Swing PTS—The Bounce 1 Swing[/caption]

STEP 3—The Bounce 2 and Bounce 3 Swings

STEP 3A

Wait for prices to move back in the direction of the Jumbo. This Bounce 1 creates what in GWT is called a Line/Test/Exceed. The most current completed swing is the line with its BP as the test and its EP as its exceed.

If the test of the Bounce 1 is broken on the Bounce 2 swing, the Jumbo is said to be still floating, in which case you redraw the Jumbo. I use a 15-minute chart to show this detail.

As a Jumbo floats, you may find you must redraw it several times.

STEP 3B

If the exceed of the Bounce 1 is broken before the test is broken, a Bounce 3 has formed. Steps 3A and 3B are shown in Figure below.

[caption id="attachment_13215" align="aligncenter" width="550"]PTS—Bounce 1-2-3 PTS—Bounce 1-2-3[/caption]

Here we have a 1-2-3 or matrix: Bounce 1—Bounce 2—Bounce 3.

The principle of propagation tells us this is now a 1 swing, a propagation 1 swing. The endpoint (EP) of the Propagation 1 may also float. If so, simply continue to redraw it.

Tip: If the Bounce 3 swing becomes more than three times the value of the Bounce 1, the setup is broken because the Propagation 1 is out of proportion. This becomes our 1 thrust's swing for the BMP.

You may get several false 1-2-3s following the Jumbo, but the requirement of a propagation filters out most of them from becoming PTS formations. If you examine a sample of Jumbos, you will see many 1-2-3s, and considerably less PTSs.

STEP 4—The Propagation 2 Swing

Now the propagation 1 has a Test/Line/Exceed and we follow the same course as in Step 3, waiting for a Propagation 2 swing to form.

Repropagations

As the Bounce 1-2-3 builds, you may find a very small 1-2-3 becoming the Bounce 1. That is okay. As long as you follow the principle of propagation from the Jumbo EP, you cannot get lost!

It is common for one of the propagation swings to be a single swing and the other to be a 1-2-3 matrix. This is called the flat/complex principle.

In Figure below, the PTS in the AUD/USD. Bounce 1—Bounce 2—Bounce 3 â†' Propagation 1 â†' Propagation 2. The Propagation 2 is the parry swing of the propagated matrix.

[caption id="attachment_13216" align="aligncenter" width="550"]A PTS in the AUD/USD A PTS in the AUD/USD[/caption]

Here is the ideal PTS paradigm in Figure below.

[caption id="attachment_13217" align="aligncenter" width="550"]The Perfect PTS and Return Zone The Perfect PTS and Return Zone[/caption]

Tip: This is also the Basic Goodman Setup for all GWT trade candidates: 1-2-3 â†' 1-2. The trade is for the Propagated 3 swing.

The 3-C principle and the PTS templates tell you when the ideal varies. For now, simply seek PTS formations in which the Propagation 2 EP falls in or very close to the return zone.

Return Zone

The area between the Propagation 1 TP and the Bounce 2 EP is called the return zone (RZ). Some Propagation 2 swings stop in the RZ but some stop slightly above it or slightly below it. Ideally, you want the Propagation 2 EP to fall in the return zone or very close to it.

You are ready to look for an entry to trade the Propagation 3 swing, which, of course, is the second thrust to this propagation.

I continue the walkthrough in the next chapter, showing the Goodman technique for entry, stop-loss placement, and take-profit prices.

Summary

Goodman Wave Theory is based on the setup 1-2-3â†'1-2 following the principle of propagation. The trade candidate is the Propagated 3 swing.

There are three Goodman setups: return, 3-D, and PTS. They differ mostly as to which primary principles of GWT they use, qualfying them from general to specific and to what degree. The return is the simplest and is often used as a complement to other trading ideas. 3-D is the most accurate but also most involved to learn and apply. The PTS is in the middle and just right for many traders.

The PTS is a tradable chart formation closely aligned with the basic market principle and uses the principle of propagation of Goodman Wave Theory.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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