Forex Trading tutorial Forex Scalping

III. THE TUNNEL METHOD

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. archarts 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 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,*,#,1,2,1#,*1,#+,11,2',1++,*##,#33. For trading purposes, the
numbers of interest are 11, 2', 1++, *##, and #33.

Step #.
4ait for the mar!et to come into the area of the -tunnel-. 4hen it brea!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 1.
5s the mar!et trades in your direction, you ta!e partial profits at the successive fib
numbers respectively, with the final portion of your position left on until one of the
following conditons occur$ 1% mar!et hits the last 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:;<S= is trading at 1.21>>. The ema's are as follows$ 1++? 1.2+'+, 1&'?
1.211*. The mar!et brea!s 1.2+'+, and you sell at 1.2+'*. @our stop and reverse is now
at 1.211*. "ver the following hours, mar!et starts to go down. +> minutes after you put
position on, cable is at 1.2++>. @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,
11 from 1.21># is 1.2++2. @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 11 was
already passed, it no longer concerns us in this cycle. 5 couple of days later, cable is at
1.2#>> and the median of ema's is 1.2+1> (1.2+>> ? 1.2+*>). @ou should be out of another
portion of the position at 1.2#*1. .ar!et bottoms here and in the next * hours, cable
screams to 1.21#1. @our remaining short position is covered at upper tunnel boundary of
1.2+*>, and you are now long from this point as well. Since you are long, you would now
Forex Trading tutorial Forex Scalping
ta!e partial profits at 1.2+31 and 1.21>'.

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 was built with far fewer percentages in the casino's 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! profits at the 11 level which satisfies the scalper in you, and
you have positioned yourself for bigger profits in the long run should the mar!et !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. THEORETICALS OR EVERYTHING HAS A REASON

PART 1. THE TUNNEL

4hy 1 hour chartsC

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:;<S= went *> handles up to 1.'1, the daily ema's were 1 to 3 handles behind.
For me, this is to much to give bac! on a long position, especially when your first profits
came at 11, and 2'.

* hour and + hour charts are roughly analogous, but , prefer the 1 hour chart for its
simplicity, and sometimes it's tough to see how a mar!et trades in a + hour period.

4hy 1++ and 1&' 1 hour ema'sC

,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. ,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
Forex Trading tutorial Forex Scalping
while you are waiting, the mar!et is going handles in a direction without your
participation.

There is another reason. 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 D1> million between 1'1> ? 1'1>. 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 or numerology,
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. Fature and the physical universe loves them. They are everywhere from
the pyramids, to mountain ranges, seashells, forests, etc. So why not mar!etsC

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, 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:;<S=,
and <S=;CBF are the most volatile followed by the 7<G;<S= and then <S=;@7F.

Therefore, , trade the 9: and CBF because they go to extremes more often than the
other pairs. These extremes (*## and #33) produce whopping profits on a regular basis. ,t
is rare to get the 7uro to the *## mar! before it crosses bac! over the tunnel. ,t Aust
happened here recently, but if you go bac! wee!s, months, and years, you will see that
Forex Trading tutorial Forex Scalping
expecting this to happen often isn't probable. Fot the case with 9: and CBF.

The higher fib numbers really are giving you that important e0uation$ price H
information. They are screaming exhaustion. ,f you do the wor! in your currency 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
informationC

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 tradesC 4hat good is a filter
if it reduces losses by 1>I ? *>I , but also reduces profitability on every trade by halfC ,
thin! you get the point.

Bere are the filters the vegas team uses. (@es, , have a team. There are # of us. 4e trade
9:;<S=, <S=;CBF, and the SJ: e?mini futures contract. 7ach has a specialty. .ine is
9:;<S=. 4e are each responsible for our main pair. "ne of us is always at the screen
when mar!ets are open. :ositions are covered by other partners when away. 4e only
tunnel trade.)

1.%
:ut the 1* ema (1 hour) on your screen with the rest of your indicators. 4hen everything
is at the same price (tunnel, current mar!et price, 1* ema) sit up and ta!e notice. 4hen
the mar!et brea!s away from the tunnel, there is a very high probability of a strong
mar!et move coming. , don't need 9ann, because this gives me time, the s0uare of time,
and price all in e0uilibrium. 4hen it brea!s, it goes.

Feed proofC 4ell, go bac! on your favorite currency pair and chec! it out. ,n the first
0uarter of *>>1, this filter alone produced *> trades, 1' which were profitable in
<S=;CBF. ,n fact, as , write this, 1 trade is still on from about # handles ago. Since , am
not responsible for Swissy, ,'m not the guy pushing the button, only monitoring it when
,'m at the screen (changing stops when needed, etc.). ut, the position is still on.

This filter is so profitable, we increase the si/e of our trading position when we see it
develop and then happen.

4hen you go bac! and chec! it out, you will notice many times how it Aust misses a
move by a few hours. ,t is an extremely profitable filter.

4e also define -same price- as being within 1 pips or so of being e0ual. Sometimes it
Forex Trading tutorial Forex Scalping
turns out the signal is exact, but , don't thin! you have to split hairs on this. 4ithin 1 pips
is good enough for us.

*.%
4e do not initiate new currency trading positions based on tunnel trading during the
5sian time?frame. 5nything between 1pm F@ and .idnight F@ is ignored for entry of
new positions. :ositions that are on are monitored as normal, i.e., everything else is the
same. 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.

#.%
Fews 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 <S Fon?Farm :ayrolls (FF:) which comes at 2$#> am F@ 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. <se the hourly charts and the most
recent hours of support and res. to ma!e the call.

,f you are a newbie to trading, you will find this to be the most troublesome filter. ,f you
are not familiar with trendlines, triangles, flags, pennants, and support and res. levels,
then go get the eduation and come bac!. Simple but necessary advice.

, don't mean to infer that Aust because you !now this technical stuff it's going to be a wal!
in the par!. ,t's not. 8et's ma!e one thing perfectly clear. 767G@ model has its vulnerable
spot that seem to increase losses. For tunnel trading, this is one of the scenarios. :utting
in the right stop is an art, not a science.

1.%
4e loo! for clean moves (1 bar) through the tunnel. This means your into profits almost
from the get?go. @ou will not always get the clean moves. The longer the mar!et stays in
the tunnel chopping around, the higher the probability our entry decision will be made on
a brea! of support or res. instead of the tunnel boundaries.

&.%
4e do not trade minor (contra?maAor) trend signals in a strong up or down mar!et price
trend. ,f the 9:;<S= is in a strong price uptrend, we will not initiate new short
positions on a brea! of the lower tunnel boundary. 4hyC ecause the probability of
success in getting past 11 from the ema is not very good. :ast history tells us that, so ,'m
not loo!ing to be the hero here and say -This time it's different.- 4hen mar!et comes
bac! through the tunnel on the upside, we will get bac! in on the long side.

,f , have to tell you when the mar!et is in a strong price move, , don't thin! you have
Forex Trading tutorial Forex Scalping
been paying attention to the price movements of late.

,n a range?bound mar!et, which we define as a mar!et between # ? 1 handles (or lower)
in a 1 wee! time?frame, we trade both sides.

Fow, that's all we use. Can you use moreC Can you invent your ownC Can @ou change
some of the definitionsC @es, absolutely. ,nvent your own filters, use an 7lliot 4ave filter,
anything you thin! will help your trading.

V. SUGGESTED MODEL SYSTEM


=o , really need to mention money managementC

, didn't thin! so.

5t a minimum you should be able to do # units to implement tunnel trading. <se the 11,
2', and 1++ levels to ta!e 1;# off at each level. ,f you can do + units, use 11, 2', 1++, and
*##. 1 units is the preferable level, and you use 11, 2', 1++, *##, and let one unit ride
until crosses over tunnel boundary or it reaches #33.

"f course, you can ma!e your units any si/e you want. For smaller traders, a unit si/e
may be 1>,>>>. ,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 can ma!e this as aggressive or
as conservative as fits your style. , will give an example of each. These are Aust examples,
,'m not saying you have 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, buy at the fib numbers.
<se previous fib numbers in the move as stop loss points. This is very aggresive, and
woul be appropriate for very short?term traders who have a time?frame of day?trading.

7xample * ? 6ery Conservative

<ses basic tunnel system with 1* ema. "nly initiates on this signal. 8oo!ing for best
possible probability trade. 4illing to give up more profitability in return for less ris!.
Trades three units. <ses fib numbers 11, and 2' for 1;# each. 8eaves the other unit on
until *## or mar!et price crosses over tunnel boundary. 5llows trader to catch short?term
Forex Trading tutorial Forex Scalping
(1?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, 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> ?*1 pips on each trade. ,f your odds of success on each trade were 1>?1> (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 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 <S
D1>>;month.

,f , was in your shoes, , wouldn't ma!e a trade without some !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 can see for yourself what tunnels do, and why the fib
numbers are so important.