Waltzing the Trade in FOREX
The Goodman Waltz refers to how a trade is managed in three steps:
- S/L is moved to breakeven.
- Half of the profit is taken at the 3-C under.
- Half of the profit is taken at the 3-C over, or used to trade the line for a larger profit if the market continues in your direction.
Now, back to the AUD/USD PTS walkthrough. It is time to enter the position. You will see the dagger and the waltz in action.
The propagation trade setup is a 1-2-3. It is therefore natural we use a 1-2-3 to enter the trade to catch the propagation 3 swing.
[caption id="attachment_13225" align="aligncenter" width="550"] PTS in the AUD/USD[/caption]
I like to take one-half of my position as soon as the dagger 3 begins to form. I call this nibbling. If the trade fails, I lose only on one-half lot. If the dagger completely forms, I take my second one-half when the dagger 1 EP is broken. If you are the conservative type, you might only enter after the dagger 3 line closes above the dagger 1 EP.
We follow PTS formations as they form and work in the GoodmanWorks Trading Room. Some members prefer to use other entry ideas such as candlesticks, Ichimoku clouds, or moving average crossovers. I prefer the dagger, as it is consistent with GWT, but as long as your method adheres to the basic market paradigm of waiting for some sign to reestablish the trend, you are okay.
As the Propagation 2 swing builds, it is sometimes necessary to enter twice, as the first dagger may be false and become part of a longer Propagation 2 swing. Qualifying with inward and outward analysis limits this issue.
Note that this AUDUSD chart formed a larger PTS as well. In the larger formation, the Bounce 1 is flat (a single swing) and the Bounce 2 is complex (a 1-2-3). The PTS is said to have repropagated. If you follow the principle of propagation from any Jumbo EP, the charts are easy to follow! Markets may propagate five or six times, going from 15-minute to 1-week propagations. See Figure below.
[caption id="attachment_13226" align="aligncenter" width="550"] Repropagation in the AUD/USD PTS[/caption]
Propagation Trade Setup TemplatesIt is possible to dig deeper on specific PTS formations that do not exactly conform to the ideal. One method is to define a PTS in terms of the lengths of the component swings in relationship to the idea. There are three primary comparisons: the Bounce 2 to the Bounce 1, the Bounce 3 to the Bounce 2 and the Propagation 2 to the Propagation 1. This can easily be quantified, as well. A 1 indicates the component is shorter than the ideal length; a 2 indicates the component is close the ideal; a 3 indicates the component is longer than the ideal.
Thus, there are 27 PTS templates, 3 Ã 3 Ã 3. Figure below shows a 3-1-3 template.
[caption id="attachment_13227" align="aligncenter" width="550"] A 3-1-3 PTS Template[/caption]
The Stop-LossThere are three possible points for a S/L in the PTS. Thus, the PTS has a method stop-loss as opposed to an ad hoc fixed dollar stop-loss.
- Below or above the Propagation 2 EP, which is also the BP of the dagger 1 swing
- Below or above the Bounce 2 EP
- Below or above the Jumbo EP
This action is shown in Figure below.
[caption id="attachment_13228" align="aligncenter" width="550"] Stop-Loss Points for a PTS[/caption]
The decision on which one to use typically depends on the template, which is a discussion beyond the scope of this book. Some of it will depend on your trading profile and your threshold of pain.
Tip: Add the spread value of the pair you are trading to the S/L. For example, if the Propagation 2 EP is at 1.0195 on a buy PTS and the spread is six pips, use 1.0189 for your initial S/L.
If the Propagation 2 is short and not very near the return zone, you may wish to nibble with a small lot and place your S/L just below or above the dagger, because the stop-loss is very long in such cases.
Breaking EvenThe first waltz step is moving your S/L to breakeven. That way, you can relax, and let the market do the talking. Your job is primarily to manage risk, letting the market decide how much profit is in the trade for you.
Mr. Goodman felt it was very important to bring your S/L to breakeven (BE) for both money management and psychological reasons. The time to do so is when the Propagation 3 swing EP breaks through the Propagation 1 EP. You do not need to bring the S/L to exactly your entry price. In fact, if there is a small line test close to the BE, it is even a better point.
Tip: Get to breakeven before thinking about profits. As soon as the Propagation 3 exceeds the Propagation 1 EPâraise your stop-loss!
Taking ProfitsThis is where the waltz comes into play.
Once you have raised your S/L to BE, it is time to do a quick 3-C to locate your T/Ps. The Goodman Wave Theory 3-C principle not only assists in qualifying a trade candidate, it also offers a built-in T/P method. To do the quick 3-C on MetaTrader 4:
- Copy the Propagation 1 line on your MetaTrader trading platform.
- Note the TP of the Propagation 1.
- Move the BP of the copied line to the TP of the Propagation 1 line.
- Measure the distance from the Propagation 1 TP to the Propagation 2 EP. This distance is your under and over, or U/O.
- Add and subtract the U/O value to the copied Propagation 1 EP. These are your under and over T/Ps.
Congratulations! You have completed two steps of the waltz.
Tip: Be careful not to bring your second-half S/L up too quickly after you take the under profit. Markets very often correct after the under before going to the over. If you raise your S/L too quickly, you will get stopped out and miss the over. This is an under-over Propagation formation in GWT. It occurs often enough that it has been studied in some depth. See Figure below.
[caption id="attachment_13229" align="aligncenter" width="550"] The Quick 3-C in the AUD/USD PTS[/caption]
Note that the spread between the under and over is wider the more the Propagation 2 EP is from the Propagation 1 TP.
You may wish to take one-half profit as soon as prices reach the over measurement of your quickie 3-C. At other times, you may wish to hold that position and see how much further the market wants to go in your direction. To do the latter, you trade the line in the Goodman Method.
Tip: The decision on whether to take the over or trade the line for more profit is based on multiple factors. If you work with the PTS, try both. But rememberâin the long run, it is the larger profits that make you a successful FOREX trader.
The SambaOne of my students devised the samba as an alternative to the waltz. The samba has four steps: breakeven, under, over, and trade the line. In such a manner, one does not need to make a decision at the over. But it is a little more complicated to manage and you need to make sure the lot size you enter can be broken into three parts to close the trade.
The Fire StarterYou may also wish to simplify the process. Another of my students devised the fire starter. He uses 15-minute charts only, no analysis of other time frames. He waits for the under one-half profit on a PTS before bringing the stop-loss to breakeven. Thereafter, he simply trades the line for as far as it will go.
By Michael Duane Archer