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Monday, May 04, 2009 2:19:23 AM
THE TUNNEL METHOD
First, you need a charting service. Since most all electronic trading platforms have charts with technical indicators, this shouldn't be a problem.
Barcharts or candlesticks really 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.
THEORETICALS OR EVERYTHING HAS A REASON
PART 1. THE TUNNEL
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 to much slippage in market price for the final portions of the position.
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 a 4 hour period.
Why 144 and 169 1 hour ema's?
It's all about momentum over the short to medium term. Lower ema's produce momentum signals that give trading signals that are to 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 to 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. Afterall, 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.
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, and/or 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 here 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.
The higher fib numbers really are giving you that important equation: price = information. They are screaming exhaustion.
THE FILTERS
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.
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.
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.
First, you need a charting service. Since most all electronic trading platforms have charts with technical indicators, this shouldn't be a problem.
Barcharts or candlesticks really 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.
THEORETICALS OR EVERYTHING HAS A REASON
PART 1. THE TUNNEL
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 to much slippage in market price for the final portions of the position.
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 a 4 hour period.
Why 144 and 169 1 hour ema's?
It's all about momentum over the short to medium term. Lower ema's produce momentum signals that give trading signals that are to 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 to 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. Afterall, 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.
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, and/or 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 here 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.
The higher fib numbers really are giving you that important equation: price = information. They are screaming exhaustion.
THE FILTERS
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.
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.
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.
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