Forex Trading tutorial
Forex Scalping
III. THE TUNNEL METHOD
Step 1. First, you need a charting ch arting service. Since most all electronic trading platforms have ch arts with technical indicators, this shouldn't be a problem. Create a 1 hour chart on whatever currency pairs interest you. archarts arch arts or candlestic!s really ma!e no difference. "verlay on this # things$ 1% a 1& period (1 hour) ema (exponential moving average), *% a 1++ period (1 hour) ema, and finally #% a 1* period (1hour) ema. The 1++ and 1& ema's create what call the -tunnel-. The 1* ema is an extremely valuable filter that you will want to have h ave there all the time. will tal! more about this in the filter section. Step *. emori/e or write down and !eep next to your trading screen the following fibonacci number se0uence$ 1,1,*,#,,2,1#,*1,#+,,2,1++,*##,#33. For trading purposes, the numbers of interest are , 2, 1++, *##, and #33. Step #. 4ait for the mar!et to come into the area of the -tunnel-. 4hen it brea!s b rea!s 5"67 the upper tunnel boundary, you go long. 4hen it brea!s 78"4 the lower tunnel boundary, you go short. Step +. Stops and reverse are placed on the other side of the tunnel. Step . 5s the mar!et trades in your direction, you ta!e partial profits at the successive fib numbers respectively, respectively, with the final portion of your position left on until one of the following conditons occur$ 1% mar!et mar!et hits the last fib fib number (#33 pips) from the ema's, or *% the mar!et eventually comes bac! to the tunnel and violates the other side. 7xample$ 9:;>. The ema's are as follows$ 1++? 1.2++, 1&? 1.21*. The mar!et brea!s 1.2++, 1.2+ +, and you sell at 1.2+*. 1 .2+*. @our @our stop and reverse is now at 1.21*. "ver the following hours, mar!et starts to go down. +> minutes after you put position on, cable is at 1.2++>. @ou @ou can use for computation purposes either tunnel boundary or the median of the tunnel. 7ma's are still the same, so if you use the median, from 1.2># is 1.2++2. 1.2+ +2. @ou @ou should have ta!en part of the position off at 1.2++2. ar!et does nothing rest of day. Stop can be moved down to protect position or left alone at tunnel. @ou are now loo!ing for price to be 2 pips away from the ema's. Since was already passed, it no longer concerns us in this cycle. 5 couple of days later, later, cable is at 1.2#>> and the median of ema's is 1.2+1> (1.2+>> (1.2+> > ? 1.2+*>). @ou @ou should be out of o f another portion of the position at 1.2#*1. ar!et bottoms here and in the next * hours, cable screams to 1.2#. @our @our remaining short position is covered at upper u pper tunnel boundary of 1.2+*>, and you are now long from this point as well. Since you are long, you would now
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ta!e partial profits at 1.2+3 and 1.2>. This is a fairly typical example. f you were to Aust stic! to this basic model, you account would grow very well over time. 8as 6egas 6egas was built with far fewer percentages in the casino's favor. favor. n case you haven't figured it out, this model cuts your losses very short. y definiton, you can't lose very much on a single trade from your initial entry position.. "n the other side, you ta!e some 0uic! 0 uic! profits at the level which satisfies the scalper in you, and you have positioned yourself for bigger profits in the long run should the mar!et !eep ! eep going in your favor. y definition, you are letting profits run. The 5chilles heal of this model is when the mar!et chops around the tunnel and gets you in and out multiple times for small losses. 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. Bas all the things every local wants in a model, except the 0uic! * pip scalps, which you can't do anyway. Cuts losses, and lets profits run. @et for its design simplicity, the thought behind is more complex. Time to tal! about that. IV. IV. THEORETICALS THEORETI CALS OR EVERYTHING HAS A REASON PART 1. THE TUNNEL
4hy 1 hour charts Smaller charting periods lead to more false positives, which translates into more losses. y the time you get to the five minute chart, the ban! has you on a string and your account is going to go to them. 8onger term charts, li!e daily and wee!ly produce to much slippage in mar!et price for the final portions of the position. n the fall of *>>+, when 9:; handles up to 1., the daily ema's were to 3 handles behind. For me, this is to much to give bac! on a long position, especially when your first profits came at , and 2. * hour and + hour charts are roughly analogous, but prefer the 1 hour chart for its simplicity, simplicity, and sometimes it's tough to see how a mar!et trades in a + hour period. 4hy 1++ and 1& 1 hour ema's t's all about momentum over the short to medium term. 8ower ema's produce momentum signals that give trading signals that are to short?term to trade profitably. profitably. n other words, the dreaded whip?saw. t may go in your direction for # minutes and & pips, then it rolls over and crushes you. Bigher ema's produce momentum signals that are to long?term and as a result you get * trading signals every # years. This isn't very good either because
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while you are waiting, the mar!et is going handles in a direction without your participation. There is another reason. 4. 4. =. 9ann 9ann was big on s0uares, s0uare roots and the inter?relationship between price and time. am not a 9ann disciple, but you can't Aust dismiss his wor! as Aun!. 5fterall, the guy made D> million between 11> ? 1>. Be deserves respect, even if you disagree with his methods. So, 1++ is the only fib number that has a whole number s0uare root (1*). The closet fib number to this s0uare root is 1#. The s0uare of 1# is 1&. The tunnel is now created. ut, the proof is in the pudding. n a trending currency mar!et (which is what it does most of the time over the long run), retracements are where you can re?establish profitable positions. 9o bac! and loo! on the 1 hourly charts and see where the retracements stop, and you will need to !now nothing more about 9ann 9an n or numerology, astrology, astrology, or anything else. They stop very close, if not exactly on the 1++ and 1& 1 hour emaE the tunnel. PART 2. THE FIB NUMBERS
7veryone should !now that all moving averages are lagging indicators. t ma!es no difference the type, they all lag. "nly after the fact can they tell you the mar!et has turned. 7ven though that is valuable information and is acted upon by ta!ing a position, it isn't going to help you much in getting the best profit potential out of your trade. f you use them exclusively to then get out, you will discover * things$ 1% you get chopped when you had a profitable trade at one point, and;or *% they too! you out on a retracement and now you don't !now what to do. can sum up everything you need to !now about fib numbers and the corresponding fib ratio of 1.&12. ature and the physical universe loves them. They are everywhere from the pyramids, to mountain ranges, seashells, forests, etc. So why not mar!ets Fib numbers are real?time. This is not a lagging indicator here. 4hen a mar!et hits a fib number from the current ema's, it is telling you that here is a natural stopping point, please ta!e some profits off the table. 4hen a mar!et goes through a fib number, number, li!e a hot !nife 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. "f the maAor pairs, 9:;
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expecting this to happen often isn't probable. ot the case with 9: and CBF. The higher fib numbers really are are giving you that important e0uation$ price H information. They are screaming exhaustion. f you do the wor! in your currency currenc y pair, you will see that the mar!et action after hitting these levels almost always involves retracement or the start of a bigger move in the opposite direction. s this not valuable va luable information For those of you who wish to trade less volatile pairs, you may want to include the #+ level in your profit?ta!ing. n this case, if you don't, you may be giving up to much by letting this level pass. PART 3. THE FILTERS
Filters are used to increase overall profitability and;or reduce overall losses. f a filter does not do one of these two things, then do not use it. 4hat good is a filter if it raises your profitability by 1>I but only gets you into 1;# as many trades 4hat good is a filter if it reduces losses by 1>I ? *>I , but also reduces profitability on every trade by half thin! you get the point. Bere are the filters the vegas team u uses. ses. (@es, (@es, have a team. There are # of us. 4e trade 9:;>, this filter alone produced *> trades, 1 which were profitable in
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turns out the signal is exact, but don't thin! you have to split hairs on this. 4ithin pips is good enough for us. *.% 4e do not initiate new currency cu rrency trading positions based on tunnel trading during the 5sian time?frame. 5nything between pm @ and idnight @ is ignored for entry of new positions. :ositions that are on are monitored as normal, i.e., everything else is the same. 4e 4e will ta!e profits if fib levels are hit. f we miss a move, then we miss a move. 5 missed move is Aust an opportunity cost. Chop?chop in 5sia will eventually cost you more money than it is worth. #.% ews days that can have a significant affect on prices are ignored. That's right, we s!ip them for entry of new positions. Currently there is only 1 day per month which 0ualifies, and that is am @ time the first Friday of each month. :ositions that are on are monitored as normal. +.% 4hen the tunnel is very narrow (most of the time), do not Aust put stop on the other side of tunnel. f you do you get whipsawed to death.
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been paying attention to the price movements of late. n a range?bound mar!et, which we define as a mar!et between # ? handles (or lower) in a wee! time?frame, we trade both sides. ow, that's all we use. Can you use more Can you invent your own Can @ou @ou change some of the definitions @es, @es, absolutely. nvent your own filters, use an 7lliot 4ave filter, filter, anything you thin! will help your trading. V. SUGGESTED MODEL SYSTEM
=o really need to mention money management didn't thin! so. 5t a minimum you should be able to do # units to implement tunnel trading. ,>>>. f you do not have the money to trade #>,>>> of something, then would advise you to save up and come bac! when you do. f your account has D*,>>> in it, you can easily implement tunnel trading with 1>! units. "ne of the greatest advantages of this model is its flexibility in its design to allow you to choose the level of ris!;reward you desire in trading. @ou @ou can ma!e this as aggressive or or as conservative as fits your style. will give an a n example of each. These are Aust examples, 'm not saying you have hav e to do this. 'm only giving you these two to stimulate your brain. n the following day and wee!s am confident you will find an appropriate level for yourself. 7xample 1 ? 6ery 5ggressive Tunnel is pivot level for buy;sell. 5bove tunnel, buy brea!s, sell at fib numbers. 5t *## an #33, fade the move for retracement. elow tunnel, sell rallies, bu y at the fib numbers.
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(1? day) profit points, and also allows him;her to ride the maAor trend if one develops. 8i!e said, these are Aust two of an infinite number of ris!;reward senarios you can develop using this model. This is not some rigid system, s ystem, where you have to do this or that. t 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. 've seen some people who have transformed this into a model you wouldn't recogni/e without !nowing what tunnel trading offers. 4hen you get right down to it, once you have adapted it into your own trading style and personal ris! model, tunnel trading will give you all you want. omentum to catch the bigger moves over time, early profit points that allow you to catch short?term movements, and the lowest ris! you can possibly have in a trade, because you are only ris!ing 1> ?* pips on each trade. f your odds of success on each trade were >?> (they aren't this low), over time you would ma!e a fortune. f you don't believe me, then do the math. :recisely because of this flexibility tunnel trading is the best model have ever seen. VI. YOUR HOMEWORK
@ou really need a good go od charting service to go bac! and loo! at the history of the currency pairs you trade. have mentioned several times of fxtre! on the forexnews forum. f you have another, great. ut for those of you who only get their charts from the trading platform where you trade, most will not allow you to bring up historical data. @ou can get a free 3?day demo of intellicharts at www.fxtre!.com. They only do forex charts. They offer spot forex on do/ens of currency pairs, with hundreds of technical indicators over the last #> years, with any time?frame you want. Therefore, you can go bac! and loo! at #> years of 1 hour charts on whatever pair you wish. 5fter 3 days the price is >;month. f was in your shoes, wouldn't ma!e a trade without some !ind ! ind of validation that what have said really is true. That is why am as!ing you to do some !ind of historical homewor! on the 1 hour charts. @ou @ou can see for yourself what tunnels do, and why the fib numbers are so important.
