Looking Inward and Outward with Your Trading System
The Goodman trading method works by starting with the most basic features and gradually sifting, filtering, and zeroing in until you have a legitimate trade candidate. Irrespective of your trading method, this is an excellent paradigm. For example, the PTS formation requires quite a bit to happen first before it is ready to trade. A 1-2-3 is not enough; the chart must then display a propagated 1-2. Look at the following applet: http://math.rice.edu/~lanius/frac/koch/koch.html Charlie called anything that allowed the trader to get closer to a candidate an overlay; others call it a filter.
The preceding fractal is an example of an overlay. You might imagine each iteration as another level of 1-2-3 price action. Another way of thinking of an overlay is to imagine a sequence of PowerPoint transparencies, each one with a bit more detail until the slide is finally complete. In Goodman Wave Theory, there are several overlays and types of overlays. They can be divided into two primary groups that Mr. Goodman called looking inward
and looking outward
from the setup. Looking inward means to examine the setup, such as a PTS itself, more closely. This is primarily done with the templates I introduced in The Dagger, the Waltz, and the Line
. Not all setups are created equal; the templates help find the best ones by overlaying the basic setup. Looking outward means seeing where the PTS fits into a larger matrix at a larger time frame. The PTS and the larger matrix should both indicate price movement in the same direction. This consitutes an excellent overlay. See Figure below for where you want buy PTS formations in the lower areas as swings up begin and sell PTS formations in the higher areas where swings down begin. [caption id="attachment_13244" align="aligncenter" width="550"]
By Michael Duane Archer