What is Bathtub Analysis?

Mr. Goodman discovered most of the principles of his wave theory by taking charts into the bath and making hypotheses. He would ask why a market did such-and-such and then make up rules to explain that behavior. This, of course, is hypothesis testing, the cornerstone of the scientific method. You can start anywhere to get the juices flowing. "What happens on the third bar after an outside bar followed by another outside bar?" Or, you may have seen something during a trading session that looked interesting and piqued your interest enough to place a note in your market diary.

If he found a rule that showed promise, he would test it over a larger number of charts. Remember, in those days, there were no computers. A larger number may have been 50 to 100 charts. Today, the trader may test thousands of data samples quickly. Tip: If he could not make the rule work most of the time with only minor refinements, he abandoned it. No curve-fitting for Charles B. Goodman. Constant curve-fitting is a sure sign the core concept is without merit. Doing bathtub analysis will accomplish two worthwhile goals for the trader:

  1. First, you may well find some new rules or chart formations that prove useful to you. As Charlie always reminded me when I thought we were done analyzing a chart, "Hold on, Dad! There is a lot going on in that chart!" I continue to do bathtub analysis almost every day. Of course, I have refined the technique and you may wish to do so, too. Instead of taking charts into the bath with me, I take them into my study, play Haydn, Mozart, or Bach, pour myself two or three fingers of a single malt scotch and go to work.
  2. Second, and perhaps even more important, doing regular bathtub analysis will keep your market mind fresh and alert. This will carry over to your trading sessions and make you a very proactive trader.
It is not enough to just keep a chart; your viewing of it must be an active process. You must work with it, and live with it. Unless you ask specific questions, make hypotheses, and seek answers in a continuing hypothesis â
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.

Posted in ...