Vegas Tunnel Trading System
Vegas is a nickname for a former local trader named Barry Haigh, who achieved fantastic gains as a forex trader. In his articles, he describes in his style his simple trading systems, which could be used in multiple time frames, he carefully explains the theory behind every part of the system. Barry also shares funny and interesting stories from his career and ideas for trading in general. If you desire a simple and comprehensive trading system or you just want to read about trading from a different angle, this article is right for you.
How did it start
“The hardest easy money you will ever make.”
The first thing a veteran trader told me the very first time I walked onto the trading floor, on my first day of trading at the now-defunct Mid America Commodity Exchange, sometime in the late Spring of 1980.
Fresh out of exchange orientation, there I am in my brand new trading jacket, with a shiny new trading badge with a red dot conspicuously placed for the world to see. I decided to start my career trading gold futures.
I hit the trading floor from the member's lounge like I own the place, striding confidently into the trading pit about 20 minutes before the open.
There are only a handful of traders there at this point, but they collectively give me a sneering look, realizing in an instant this is the day of the month when new members are unleashed onto the floor. I come to realize very quickly all newbies are treated like financial road-kill by the veteran floor members.
We are there to fund their free-wheeling lifestyle, make the payment on the Porsche, maybe even fund juniors’ college. We are not there to survive and buck the odds. We are not there to add to the pit population. If we survive it means the same amount of public orders divided by more people, and that ultimately means less money in their pocket.
As the gold market gets closer to the open, members start coming in at a rapid rate.
I get jostled around like a pinball, moving from spot to spot because I am standing in some members much-coveted space.
I feel that if one more guy [not many, if any girls] squeezes into this pit it’s going to explode.
I am so close to people that if I moved about three inches I could kiss them.
I feel like I am prepared, having spent weeks memorizing hand signals, bidding and offering protocols, checking trades, and proper record-keeping measures mandated by the exchange and the CFTC [Commodity Futures Trading Commission].
Just a couple of minutes until the market goes live.
Pit energy is rising exponentially as brokers are yelling out pre-open bids and offers, giving the pit an idea where the price will be when the opening bell rings.
Members are also trying to get the brokers attention, to let them know how interested they are, and at what price, in filling their orders.
I am nervous and excited, thoughts racing through my head.
Can I do this? This place is nuts!! Will I remember how to bid and offer? On and on ad infinitum. Ten seconds to liftoff.
I have been waiting for this moment a long time.
Working, saving, and planning for well over a year. I have hocked everything I own to be here.
I have begged every relative from immediate family to the eighth cousin twice removed for money [It’s a great way of making sure you never have to see them again].
I raise enough money to be here, but just barely. I start with about $8,000 in my trading account after I buy my membership [about $10,000]. I have a wife, a two-year-old son, and outside of my trading account, about $10 in the bank. I have a rent payment and an 11-year-old car that uses more oil than gas.
I have a family [both sides] that thinks I am completely out of my mind. I am a sucker, a sap, a nit-wit, an idiot.
They’re making bets with each other the exact day I blow out, with the over-under at about 30 days.
How can you do this to your wonderful wife and son, you irresponsible dumb-ass?
Pressure, what pressure? Do you think this is pressure?
The opening bell rings. All hell breaks loose from every direction. I am being hit from all sides, screaming people in my face. Everything is moving at warp 10.
Price going up, down, and sideways.
Bids are over offers in parts of the pit, and people are already threatening fights. I get hit with a wad of spit on the front of my jacket.
Nice I think; wonder which cockroach this came from. In no way, shape, or form am I ready for this. I’m paralyzed.
At the end of the day, I’m down about $50 on 2 trades that I made. Not bad I think, but I’m physically and mentally exhausted.
I will do better tomorrow. I make my way up to my clearing house to put my trading jacket and tie in the trader's lounge and gather my things and go home.
I put my trader jacket and tie on a hanger and notice that somebody has penned on the back of my jacket [black magic marker] the following: “FAG Trading”.
No wonder those babes in the elevator were laughing. Welcome to the exchange. Can you take it?
Twenty-five plus years have passed since that first day, and I still remember it as if it were last Thursday. I often think of what that veteran trader told me. Simple, funny and perceptibly accurate. A perfect colloquialism illuminating life as a trader.
I know many of you who are reading this are losing money trading futures and/or forex.
It makes no difference if you are a newbie or have been losing for years.
You’ve spent hundreds, maybe even thousands of dollars on worthless seminars and/or systems in an attempt to turn things around.
Everything seems so promising yet losses continue to mount. You’re confused about how to stop the bleeding.
While you sit at your computer screen [instead of standing in a pit at an exchange] you go through the same emotions, bewilderment, hurt and shock that I experienced in the very early part of my floor career.
Pit trader or computer trader; every trader, sooner or later, face the trading demons.
Please take heart!! I have walked in your shoes. I understand totally what you are going through.
However, it is time to take trading matters in a different direction.
That is the purpose of this file. I am going to layout a trading plan for you to become wealthy. All it takes is time and your ability to implement the plan [more on this second point in a minute]. What makes making money in futures and/or forex easy is
1) Having a method,
2) Implementing the method at the proper time without second-guessing yourself
3) Staying with the trade until the market tells you it is time to exit.
I receive many emails from people who are bewildered at why I am willing to share my trading secrets [up until now the 1 hour and 4-hour tunnel trading methods] with the general public for free.
It is very simple. First, many veteran traders early in my career helped me enormously.
They gave and never once asked for anything in return. They didn’t have to do it, but they did it out of a sense of “what goes around comes around”.
Secondly, it does not cost me anything to share my knowledge of markets.
Even if everyone who reads this implements it exactly as written, it won’t affect any currency pair 1 pip. Finally, I am disgusted at the hucksters who have built an entire cottage industry out of the misery of newbies and losers. Preying on their hope, all they do is separate people from their cash.
My challenge is to communicate what I know about this effectively. As a donor, I will do my best. As the donee, do what it takes to make the change and become a winner.
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The Vegas Tunnel Method - Step By Step
Step 1
First, you need a charting service.
Since most all electronic trading platforms have charts with technical indicators, this shouldn’t be a problem.
Create a 1-hour chart on whatever currency pairs interest you. Barcharts or candlesticks make no difference. Overlay on this 3 things: 1) a 169 period [1 hour] ema [exponential moving average], 2) a 144 period [1 hour] ema, and finally 3) a 12 period [1hour] ema.
The 144 and 169 ema’s create what I call the “tunnel”. The 12 ema is an extremely valuable filter that you will want to have there all the time. I will talk more about this in the filter section.
Step 2
Memorize or write down and keep next to your trading screen the following Fibonacci number sequence: 1,1,2,3,5,8,13,21,34,55,89,144,233,377. For trading purposes, the numbers of interest are 55, 89, 144, 233, and 377. Insert the levels into the chart. To do so, click one of the moving averages with the right mouse button and choose properties. In the open window on the Levels tab, enter the appropriate levels as shown. Beware, however, for pairs with five decimal points, the value has to be multiplied by ten, as the system was created for pairs with four decimal places.
Step 3
Wait for the market to come into the area of the “tunnel”. When it breaks ABOVE the upper tunnel boundary, you go long. When it breaks BELOW the lower tunnel boundary, you go short.
Step 4
Stops and reverse are placed on the other side of the tunnel.
Step 5
As the market trades in your direction, you take partial profits at the successive fib numbers respectively, with the final portion of your position left on until one of the following conditions occur: 1) market hits the last fib number [377 pips] from the ema’s, or 2) the market eventually comes back to the tunnel and violates the other side.
Example: GBP/USD is trading at 1.8500. The ema’s are as follows: 144- 1.8494, 169- 1.8512. The market breaks 1.8494, and you sell at 1.8492. Your stop and reverse are now at 1.8512.
Over the following hours, the market starts to go down. 40 minutes after you put position on, the cable is at 1.8440.
You can use for computation purposes either tunnel boundary or the median of the tunnel.
Ema’s are still the same, so if you use the median, 55 from 1.8503 is 1.8448. You should have taken part in the position off at 1.8448.
The market does nothing rest of the day. Stop can be moved down to protect the position or left alone at a tunnel.
You are now looking for price to be 89 pips away from the emas.
Since 55 was already passed, it no longer concerns us in this cycle.
A couple of days later, the cable is at 1.8300 and the median of ema’s is 1.8410 [1.8400 – 1.8420].
You should be out of another portion of the position at 1.8321.
Market bottoms here and in the next 2 hours, cable screams to 1.8535. Your remaining short position is covered at the upper tunnel boundary of 1.8420, and you are now long from this point as well. Since you are long, you would now take partial profits at 1.8475 and 1.8509.
This is a fairly typical example.
If you were to just stick to this basic model, your account would grow very well over time. Las Vegas was built with far fewer percentages in the casino’s favor.
In case you haven’t figured it out, this model cuts your losses very short. By definition, you can’t lose very much on a single trade from your initial entry position.. On the other side, you take some quick profits at the 55 level which satisfies the scalper in you, and you have positioned yourself for bigger profits, in the long run, should the market keep going in your favor. By definition, you are letting profits run.
The Achilles heel of this model is when the market chops around the tunnel and gets you in and out multiple times for small losses. I will cover how to deal with this in the filters section.
That’s it. This is the model. Fairly simple in its design, and easy to remember. Has all the things every local want in a model, except the quick 2 pip scalps, which you can’t do anyway. Cuts losses and lets profits run. Yet for its design simplicity, the thought behind is more complex. Time to talk about that.
Why 1-hour charts?
Smaller charting periods lead to more false positives, which translates into more losses.
By the time you get to the five-minute chart, the bank has you on a string and your account is going to go to them.
Longer-term charts, like daily and weekly produce too much slippage at the market price for the final portions of the position. In the fall of 2004, when GBP/USD went 20 handles up to 1.95, the daily ema’s were 5 to 7 handles behind.
For me, this is too much to give back on a long position, especially when your first profits came at 55, and 89.
2 hour and 4-hour charts are roughly analogous, but I prefer the 1-hour chart for its simplicity, and sometimes it’s tough to see how a market trades in 4 hours.
Why 144 and 169 1 hour emas?
It’s all about momentum over the short to medium term.
Lower ema’s produce momentum signals that give trading signals that are too short-term to trade profitably.
In other words, the dreaded whip-saw. It may go in your direction for 3 minutes and 6 pips, then it rolls over and crushes you.
Higher ema’s produce momentum signals that are too long-term and as a result, you get 2 trading signals every 3 years. This isn’t very good either because while you are waiting, the market is going handles in a direction without your participation.
There is another reason. W. D. Gann
Gann was big on squares, square roots and the inter-relationship between price and time. I am not a Gann disciple, but you can’t just dismiss his work as junk. After all, the guy made $50 million between 1910 – 1950. He deserves respect, even if you disagree with his methods.
So, 144 is the only fib number that has a whole number square root [12]. The closet fib number to this square root is 13. The square of 13 is 169. The tunnel is now created.
But, the proof is in the pudding.
In a trending currency market [which is what it does most of the time over the long run], retracements are where you can re-establish profitable positions. Go back and look on the 1 hourly charts and see where the retracements stop, and you will need to know nothing more about Gann or numerology, astrology, or anything else. They stop very close, if not exactly on the 144 and 169 1 hour ema; the tunnel.
2. The Fib Numbers
Everyone should know that all moving averages are lagging indicators.
It makes no difference the type, they all lag. Only after the fact can they tell you the market has turned.
Even though that is valuable information and is acted upon by taking a position, it isn’t going to help you much in getting the best profit potential out of your trade. If you use them exclusively to then get out, you will discover 2 things:
1) you get chopped when you had a profitable trade at one point
2) they took you out on a retracement and now you don’t know what to do.
I can sum up everything you need to know about fib numbers and the corresponding fib ratio of 1.618.
Nature and the physical universe loves them.
They are everywhere from the pyramids to mountain ranges, seashells, forests, etc. So why not markets?
Fib numbers are real-time. This is not a lagging indicator here. When a market hits a fib number from the current ema’s, it is telling you that there is a natural stopping point, please take some profits off the table.
When a market goes through a fib number, like a hot knife through butter, it is giving you further information about momentum in the move.
Currency pairs that are relatively more volatile than others will experience the higher fib numbers more often than the less volatile pairs.
Of the major pairs, GBP/USD, and USD/CHF are the most volatile followed by the EUR/USD and then USD/YEN.
Therefore, I trade the GBP and CHF because they go to extremes more often than the other pairs. These extremes [233 and 377] produce whopping profits regularly.
It is rare to get the Euro to the 233 marks before it crosses back over the tunnel. It just happened here recently, but if you go back weeks, months, and years, you will see that expecting this to happen often isn’t probable. Not the case with GBP and CHF.
The higher fib numbers are giving you that important equation: price = information.
They are screaming exhaustion. If you do the work in your currency pair, you will see that the market action after hitting these levels almost always involves retracement or the start of a bigger move in the opposite direction. Is this not valuable information?
For those of you who wish to trade less volatile pairs, you may want to include the 34 levels in your profit-taking. In this case, if you don’t, you may be giving up too much by letting this level pass.
Filters are used to increase overall profitability and/or reduce overall losses. If a filter does not do one of these two things, then I do not use it. What good is a filter if it raises your profitability by 10% but only gets you into 1/3 as many trades? What good is a filter if it reduces losses by 10% – 20 %, but also reduces profitability on every trade by half? I think you get the point.
Here are the filters the vegas team uses. [Yes, I have a team. There are 3 of us. We trade GBP/USD, USD/CHF, and the S&P e-mini futures contract. Each has a specialty. Mine is GBP/USD. We are each responsible for our main pair. One of us is always at the screen when markets are open. Positions are covered by other partners when away. We only tunnel trade.]
1.) Put the 12 ema [1 hour] on your screen with the rest of your indicators. When everything is at the same price [tunnel, current market price, 12 ema] sit up and take notice. When
the market breaks away from the tunnel, there is a very high probability of a strong market move coming.
I don’t need Gann, because this gives me time, the square of time, and price all in equilibrium. When it breaks, it goes.
Need proof? Well, go back on your favorite currency pair and check it out. In the first quarter of 2005, this filter alone produced 20 trades, 19 which were profitable in USD/CHF. As I write this, 1 trade is still on from about 3 handles ago. Since I am not responsible for Swissy, I’m not the guy pushing the button, only monitoring it when I’m at the screen [changing stops when needed, etc.]. But, the position is still on.
This filter is so profitable, we increase the size of our trading position when we see it develop and then happen.
When you go back and check it out, you will notice many times how it just misses a move by a few hours. It is an extremely profitable filter.
We also define “same price” as being within 5 pips or so of being equal. Sometimes it turns out the signal is exact, but I don’t think you have to split hairs on this. Within 5 pips is good enough for us.
2.) We do not initiate new currency trading positions based on tunnel trading during the Asian time-frame.
Anything between 5 pm NY and Midnight NY is ignored for entry of new positions.
Positions that are on are monitored as normal, i.e., everything else is the same.
We will take profits if fib levels are hit. If we miss a move, then we miss a move. A missed move is just an opportunity cost. Chop-chop in Asia will eventually cost you more money than it is worth.
3.) News days that can have a significant effect on prices are ignored.
That’s right, we skip them for entry of new positions. Currently, there is only 1 day per month which qualifies, and that is US Non-Farm Payrolls [NFP] which comes at 8:30 am NY time the first Friday of each month.
Positions that are on are monitored as normal.
4.) When the tunnel is very narrow [most of the time], do not just put stop on the other side of the tunnel. If you do you get whipsawed to death. Use the hourly charts and the most recent hours of support and res. to make the call.
If you are a newbie to trading, you will find this to be the most troublesome filter. If you are not familiar with trend lines, triangles, flags, pennants, and support and res. levels, then go get the education and come back. Simple but necessary advice.
I don’t mean to infer that just because you know this technical stuff it’s going to be a walk in the park. It’s not. Let’s make one thing clear. EVERY model has its vulnerable spot that seems to increase losses. For tunnel trading, this is one of the scenarios. Putting in the right stop is an art, not a science.
5.) We look for clean moves [1 bar] through the tunnel. This means your into profits almost from the get-go. You will not always get clean moves. The longer the market stays in the tunnel chopping around, the higher the probability our entry decision will be made on a break of support or res. instead of the tunnel boundaries.
6.) We do not trade minor [contra-major] trend signals in a strong up or down market price trend. If the GBP/USD is in a strong price uptrend, we will not initiate new short positions on a break of the lower tunnel boundary. Why? Because the probability of success in getting past 55 from the ema is not very good. History tells us that, so I’m not looking to be the hero here and say “This time it’s different.” When the market comes back through the tunnel on the upside, we will get back in on the long side.
If I have to tell you when the market is in a strong price move, I don’t think you have been paying attention to the price movements of late.
In a range-bound market, which we define as a market between 3 – 5 handles [or lower] in a 5-week time-frame, we trade both sides.
Now, that’s all we use. Can you use more? Can you invent your own? Can you change some of the definitions? Yes, absolutely. Invent your filters, use an Elliot Wave filter, anything you think will help your trading.
Do I need to mention money management?
I didn’t think so.
At a minimum, you should be able to do 3 units to implement tunnel trading. Use the 55, 89, and 144 levels to take 1/3 off at each level. If you can do 4 units, use 55, 89, 144, and 233. 5 units are the preferable level, and you use 55, 89, 144, 233, and let one unit ride until crosses over tunnel boundary or it reaches 377.
Of course, you can make your units any size you want. For smaller traders, a unit size maybe 10,000. If you do not have the money to trade 30,000 of something, then I would advise you to save up and come back when you do. If your account has $2,000 in it, you can easily implement tunnel trading with 10k units.
One of the greatest advantages of this model is its flexibility in its design to allow you to choose the level of risk/reward you desire in trading.
You can make this as aggressive or as conservative as fits your style. I will give an example of each. These are just examples,
I’m not saying you have to do this. I’m only giving you these two to stimulate your brain. In the following day and weeks, I am confident you will find an appropriate level for yourself.
Example 1 – Very Aggressive
The tunnel is pivot level for buy/sell. Above the tunnel, buy breaks, sell at fib numbers. At 233 an 377, fade the move for a retracement. Below tunnel, sell rallies, buy at the fib numbers. Use previous fib numbers in the move as stop-loss points. This is very aggressive and would be appropriate for very short-term traders who have a time-frame of day-trading.
Example 2 – Very Conservative
Uses basic tunnel system with 12 ema. Only initiates on this signal. Looking for the best possible probability trade. Willing to give up more profitability in return for less risk. Trades three units. Uses fib numbers 55, and 89 for 1/3 each. Leaves the other unit on until 233 or market price crosses over tunnel boundary. Allows trader to catch short-term [1-5 day] profit points, and also allows him/her to ride the major trend if one develops.
As I said, these are just two of an infinite number of risk/reward scenarios you can develop using this model.
This is not some rigid system, where you have to do this or that. It is adaptable, with no right or wrong answers.
This is why many locals from soybeans to bonds to gold and silver, oil, etc. use it. I’ve seen some people who have transformed this into a model you wouldn’t recognize without knowing what tunnel trading offers.
When you get right down to it, once you have adapted it into your trading style and personal risk model, tunnel trading will give you all you want.
Momentum to catch the bigger moves over time, early profit points that allow you to catch short-term movements, and the lowest risk you can have in a trade because you are only risking 10 -25 pips on each trade. If your odds of success on each trade were 50-50 [they aren’t this low], over time you would make a fortune. If you don’t believe me, then do the math.
Precisely because of this flexibility tunnel trading is the best model I have ever seen.
The 4 Hour Vegas Momentum Tunnel Method
Step 1.
Create a weekly chart [bar or candle] of a currency pair. On this chart overlay a 21 EMA [(H + L)/2], and a 5 SMA [(H + L)/2]. Note that the 21 period is an exponential moving average and the 5 periods is a simple moving average.
Now, look at the difference between the two. As a market rises overtime on the weekly chart, the 5 will rise faster relative to the 21. As the market goes down, the 5 will lose faster relative to the 21. The difference, in pips between the two, measures relative momentum of the market in real-time. Each week, as long as the number of pips keeps rising [SMA 5 – EMA 21] from the previous week, the market continues in a bull run. Once a bull run loses pips [SMA 5 – EMA 21] from the previous week, it signals a medium term top in the market. Conversely, once a bear run loses pips [EMA 21 – SMA 5] from the previous week, it signals a medium-term bottom in the market.
This now gives us [with only one week lag] a positive probabilistic model in determining which side [long or short] to initiate trades in a defined period. We are identifying market momentum.
Step 2
Create a 4-hour chart [bar or candle] of the same currency pair. On this chart overlay a 55 SMA [(H + L)/2], and an 8 SMA [Close only].
To insert fibo levels, click one of the moving averages with the right mouse button and choose properties. In the open window on the Levels tab, enter the appropriate levels as shown. Beware, however, for pairs with five decimal points, the value has to be multiplied by ten, as the system was created for pairs with four decimal places.
Now, look at the difference between the two on your 4-hour chart. Since we are using different types of MA’s and a shorter time with a relatively longer period, the two will cross many times. We call these MOMENTUM tunnels.
So, we now take a look at the weekly chart again and determine that we are in a bull run. We then take a look at the 4-hour chart. We now know that we are looking to long the market and that short positions will not be taken because they have been predetermined to be low probability events for large profits.
We now are looking for the 8 SMA to move lower through the 55 SMA. When it does, we carefully watch and notice when the SLOPE of the 8 SMA changes from negative to positive. It will do this when the 8 SMA stops losing value in one 4 hour bar and gains in the next. This is the 4-hour bar to initiate new long positions with 3 units [remember: units are whatever trading size you can handle. When you trade bigger, just adjust the size of the unit, not the number of units]. Stops can be placed using technicals [support/res/trendline] of the most recent 4-hour bars.
Assuming the market starts to go up, we stay long until 1) at some point in time the 8 SMA changes slope from positive to negative, at which point we exit the entire 3 unit trade, 2) the market moves up, there is no slope change, and goes to the 144 or 233 fib number from the 55 SMA line, where 1 unit is taken off, 3) the market moves up to the next fib number [233 or 377], again with no slope change, and the 2nd unit is booked.
Let’s now assume that the weekly chart determines we are in a bear run. We will now be looking to initiate new short positions only.
We are looking for the 8 SMA to move higher through the 55 SMA. When it does, we carefully watch and notice when the SLOPE of the 8 SMA changes from positive to negative. It will do this when the 8 SMA stops gaining value in one 4 hour bar and loses in the next. This is the 4-hour bar to initiate new short positions with 3 units. Again, stop placement depends on the technicals of the most recent 4-hour bars.
Assuming the market starts to go down, we stay short until 1) at some point in time the 8 SMA changes slope from negative to positive, at which point we exit the entire 3 unit trade, 2) the market moves down, there is no slope change, and goes to the 144 or 233 fib number from the 55 SMA line, where 1 unit is taken off, 3) the market moves down to the next fib number [233 or 377], again with no slope change, and the 2nd unit is booked.
There will be times when the slopes will change and the 8 SMA will not be above/below the 55 SMA line. In these circumstances, we use only 1 ½ unit to initiate a trade with the same rules above.
We are implementing this new 4-hour method with only 2 filters. The first is on the weekly chart. If the difference between the 21 EMA and the 5 EMA is > 500 pips, then the pip difference from the prior week must change by more than 10 pips, or just go lower over 2 consecutive weeks, to signal a trend change.
The second filter is on the 4-hour chart. If the 8 SMA and the 55 SMA and the market price are all within 50 pips or so of each other, we go to technicals [breakout] to continue the trade. We do this because, at this juncture, you are more likely to get the 8 SMA jumping up and down 2 or 3 pips every few bars, thus generating a false trade signal. It doesn’t happen very often, but when it does, using this filter can save us money, and the market isn’t moving anywhere anyway. Therefore, a breakout of the techs makes sense to initiate a trade, if it’s in the direction you are supposed to be trading.
If you now go ahead and make the charts and take a cursory look at the weekly, you should be amazed. The weekly criteria hit every single turn in the market within a couple of weeks. The fact of the matter is that the weekly difference of the MA’s TRENDS. It doesn’t change gaining/losing unless the trend changes.
The 4-hour chart is equally powerful. A more careful look at the 4 hours will show large 4-hour bar spikes that often change the slope of the 8 SMA. The reason we chose the 8 SMA with close only, is so that we can better estimate in the next 4 hour bar period the price needed to change the slope before the period is over. Many times this will give us a huge profit advantage over waiting until the period is over.
‘The trend is your friend.’ Market colloquialism
It should come as no surprise that I believe most of you are wasting your time and energy on scalping and/or day-trading. The first step to take is to lengthen your time horizon for making money. Call it one of the pillars of ‘Vegas Law’s Of Trading’. Wealth, from trading, is directly proportional to the length of time you base a trade. The universe of time being from seconds to days [not weeks and months].
I receive many emails from people who tell me they cannot implement the 1 hour and/or the 4-hour tunnel methods because they either have to work for a living [or travel quite a bit for work] or don’t want to sit in front of a computer screen all day and night. They all ask what strategy can work given these restrictions. Move to the daily charts and implement what I call ‘The Vegas Currency Daily’.
Step 1
Create a daily candlestick [or OHLC bar chart if you prefer] for any currency pair.
Step 2
Overlay on this chart a 24 EMA [exponential moving average] and a 28 EMA. This is the daily tunnel. Calculate the appropriate fib levels for the currency pair. Insert the levels into the chart. To do so, click one of the moving averages with the right mouse button and choose properties. In the open window on the Levels tab, enter the appropriate levels as shown. Beware, however, for pairs with five decimal points, the value has to be multiplied by ten, as the system was created for pairs with four decimal places.
To insert the fibo levels into the chart, click one of the moving averages with the right mouse button and choose properties. In the open window on the Levels tab, enter the appropriate levels as shown. Beware, however, for pairs with five decimal points, the value has to be multiplied by ten, as the system was created for pairs with four decimal places.
I have scripted a plug-in called ‘Vegas Currency Daily’ to use on the daily charts. It will plot and draw the tunnel EMA’s as well as various fib levels [three on each side of the tunnel per model #]. Download it HERE for the pairs with 4 decimal points and HERE for the pairs with 5 decimal points.
When you open ‘Vegas Currency Daily’ you have 4 input models [fib numbers] to choose from. They are as follows:
Model #1 = 89, 144, 233
Model #2 = 144, 233, 377
Model #3 = 233, 377, 610
Model #4 = 377, 610, 987
For the following currency pairs, use the following model # on your daily chart.
EUR/USD – Model # 1 AND Model #2. Overlay #2 after you have set up Model #1. Just go back and do #2. This will now produce an overlap of #1 and #2 And produce 4 fib lines on both sides of the tunnel [for a total of 8]. You will now have fib numbers calculated at 89, 144, 233, and 377 from the daily tunnel.
GBP/USD – Model #1 AND Model #3. Overlay #3 after you have set up Model #1. You now have 5 fib lines on both sides of the tunnel [for a total of 10]. The fib numbers are calculated at 89, 144, 233, 377, and 610 from the daily tunnel.
USD/CHF – Model #2. You now have 3 fib lines on both sides of the tunnel [for a total of 6]. The fib numbers are calculated at 144, 233, and 377 from the daily tunnel.
USD/JPY – Model # 1. You now have 3 fib lines on both sides of the tunnel [for a total of 6]. The fib numbers are calculated at 89, 144, and 233 from the daily tunnel.
AUD/USD – Model # 1. You now have 3 fib lines on both sides of the tunnel [for a total of 6]. The fib numbers are calculated at 89, 144, and 233 from the daily tunnel.
USD/CAD – Model #2. You now have 3 fib lines on both sides of the tunnel [for a total of 6]. The fib numbers are calculated at 144, 233, and 377 from the daily tunnel.
EUR/JPY – Model #2. You now have 3 fib lines on both sides of the tunnel [for a total of 6]. The fib numbers are calculated at 144, 233, and 377 from the daily tunnel.
EUR/GBP – Model # 1. You now have 3 fib lines on both sides of the tunnel [for a total of 6]. The fib numbers are calculated at 89, 144, and 233 from the daily tunnel.
Step 3
We are interested only when the market gets to the following fib numbers per appropriate currency pair. They are as follows:
EUR/USD – When it reaches the third fib level [233] or higher.
GBP/USD – The third fib level [233] and higher.
USD/CHF – The second fib level [233] and higher.
USD/JPY – The second fib level [144] and higher.
AUD/USD – The second fib level [144] and higher.
USD/CAD – The second fib level [233] and higher.
EUR/JPY – The second fib level [233] and higher.
EUR/GBP – The first fib level [89] and higher.
Once these fib levels are breached, we now look for specific technical indicators that signal a reverse in trend. These are [in no importance of order] 1) Reversals, 2) Spinning Tops, 3) Hammer and/or Hanging man, and 4) Inverted Hammer and/or Shooting Star [For those who need a quick lesson in Candlesticks go to the following website: http://www.stockcharts.com/education/ChartAnalysis/candlesticks.html ].
Step 4 – Strategy
1) When the black dots are above the tunnel, initiate short positions. When the black dots are below the tunnel initiate long positions. It is important to remember that just because the market breaches a fib line, it doesn’t mean it’s time to enter a position. We must wait [have patience] for the market to tell us when it’s over. We want the market to exhaust itself before we enter.
2) Stops are placed above the recent market high for short positions, and below the recent market low for long positions. An example will clarify. Go to Appendix B and look at chart 5 [GBP/USD]. The first black dot on the chart is a reversal day about 8/17/05 at the fourth [377] fib level. This is our signal to initiate a new short position at approximately 1.81 and change. The stop would be placed above 1.8190, the most recent market high.
3) After initiating a new position, and stops are in place, we look to take 50% of position off at/or around the tunnel. In other words, we book half the position for a profit. Stop on the other 50% of the position is raised to an appropriate profit level or breakeven.
4) The last 50% of the position is held until we get the opposite signal on the other side of the tunnel [first part of step 3].
5) If you have 2 losing trades in a row, it’s a message that the market is in a very strong trend. You, therefore, must not initiate a new position [with appropriate stop] until you get a signal at the LAST fib level on your chart. In GBP/USD, for example, this would be at the fifth [610] fib level. If this leads to a losing trade, then we must wait for the market to come back to the tunnel and start over.
6) I have no problem for those who wish to adjust the last 50% of their position to something else. Perhaps you will trail the market with a stop, or look to get out, for example in a bull run, with a violation of the previous days low. Maybe you have something else in mind. That’s OK because this is not trying to fit a square peg into a round hole.
I think you can see quite clearly this is a very profitable strategy in all currency pairs.
The key here is discipline.
Although there are some losing trades [any method or system will have them, and if they don’t run away as fast as you can], in the scheme of things [our trading plan] they are very small versus our winning trades.
This is the “Holy Grail” of trading. What I mean is that once you have a winning trade, you’re holding the winning cards at the table. Your options are infinite, and the pressure of holding a losing position is not present.
The one remaining thing I would like to say is that I wouldn’t get too nit-picky about the candle formations I look for.
My spinning top may not be the exact textbook version, but I guarantee it is close. Same with the other signals.
I’m not trying to be a candlestick guru, dissecting textbook versions to be perfect. All I’m attempting to do is find where the market exhausts itself for a nice move in the other direction. Will this be the start of the next big trend? Who cares?
This is PART I in implementing the ‘Vegas Wealth Builder’.
You pick the currency pairs you are interested in trading. Some people may be conservative [the crosses, and AUD/USD for example], others may be very aggressive [GBP/USD and EUR/YEN for example]. It’s your choice depending on your trading style, tolerance for risk, and the size of your trading account.
You also pick the size you trade, how you trade [spot or futures on Globex], and where you trade [brokerage house] based on what’s best for your situation.
For those not inclined to try and trade the market with the 1 hour or 4 hour tunnel methods [or any other method or system for that matter], currency pairs should represent approximately 60 to 80 percent of your trading equity.
