4HVegas 交易法

4H Tunnel Method — Vegas

THEORY

From the first time we used the 1 hour tunnel method [1999] to trade spot forex on an electronic platform, we have spent almost all our time thinking about its major weakness. I am, of course, referring to chop around the 144ema/169ema tunnel. Get rid of that, and you have found the “holy grail” of trading. Over the years, we have added filters and improved our risk model to enhance profitability. We have done all these things, yet at the end of a large move, we don’t have the profits we would like to have captured. We missed the major momentum of the move by taking units off at the lower fib numbers. This has to be done, though, to make up for chop around the tunnel at other times. At the end of a move we have 1 unit, when in reality we should have more. Over time, this makes a huge difference in profitability.

We think the new 4 hour method addresses these issues and makes for a better method in the long run. Specifically, it does a number of things. 1) It eliminates chop and indecision around the new 4 hour tunnel by not requiring the market to move through the tunnel to initiate a new position. The 4 hour tunnel is now used only to calculate position size and fib numbers 144, 233, and 377. 2) It tells us which side of the market is trending, requiring us to trade from the “right” [most profitable] side [long or short], eliminating low probability trades. 3) It allows for more money to be in play until the end, thereby increasing long-run profitability.

When all of these points are combined, it allows us to initiate new positions by selling rallies in bear markets, and buying dips in bull markets. As the momentum of the medium-term trend re-appears we move to take profits when it starts to decelerate, or hits a fib number [144 and 233 in less volatile pairs, 233 and 377 in more volatile pairs]. This allows for greater profits because you don’t have to wait for the market to cross the tunnel before the last units come off. By definition, the model will get you out within a few 4 hour bars of the high/low of a defined time period.

I mentioned in the forward that we are changing our definition of what constitutes the “tunnel”. The 1 hour tunnel is strictly “market price” oriented. Wherever the market goes, the EMA’s [exponential moving average] will follow respectively. The 4 hour method relies on “momentum”. The 4 hour tunnel is defined as follows:

1.    A 55 SMA [simple moving average, (H + L)/2], and

2.    an 8 SMA [close only].

In addition, the 4 hour method needs a WEEKLY 21 EMA [exponential moving average, (H + L)/2] and a 5 SMA [(H + L)/2]. This will allow us to determine a medium-term, tradable trend. Once we have identified this trend, we initiate new positions in a currency pair from that side only.

As Vegas pointed out the 4H method, unlike 1H, is based on the price momentum, here is the detail of the method.

THE 4 HOUR 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 period is a simple moving average.

Now, look at the difference between the two. As a market rises over time 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 time 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].

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 period 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 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 units 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 really 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 hits 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 hour 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.