Goodman Wave Theory (GWT, Goodman) was developed by trader Charles B. Goodman in the 1940s and 1950s. He used it very successfully in commodity futures and equities. GWT is derived from four simple and transparent concepts, which I will explain in this article. The axiom of 1-2-3, the propagation principle, the intersection principle, and the 3-C principle. These will also demonstrate how Goodman differs from the better-known Elliott. Finally, I show the basic GWT trade setup, which you can begin studying and testing in the markets right away.
There are many other market wave theories. Elliott Wave Theory has been the most popular for decades. Closer to the Goodman Wave space, there are other wave theories based on the 1-2-3 concept. Appendix D offers resources if you wish to dig deeper.
In Goodman Wave Theory, everything is a 1-2: 1) a swing in the primary direction, 2) a swing in the secondary direction, and 3) a second swing in the primary direction. The 1-2-3 is the building block of all markets. This is, of course, the basic market paradigm. The principles and rules of GWT tell us how these 1-2-3s combine at multiple price levels to form a price chart we see of any given market. Small 1-2-3s are said to propagate into larger 1-2-3s and are said to nest within the larger 1-2-3s.
A 1-2-3 is called a matrix. Let’s begin with a look at the ideal matrix, which is familiar to many traders as the 50 percent rule and measured move rule. The 50 percent rule states that prices will find support or resistance at the 50 percent retracement of a price swing. The logic is easy enough to understand. At the 50 percent point, all the buyers and sellers in the swing area.