THE TUNNEL METHOD BY VEGAS FORWARD

Please take the time to read and evaluate this information carefully. Turn the TV off, kick the kids out of the room, and give this the serious attention it deserves. Every word in this document is here for a reason. I fully realize that most will take the information seriously, but that some will not. That is O with me. I am not sharing this to gain a single thing from anyone. I do not want !art of your !rofits, nor do I seek any monetary com!ensation from you. "ou can share this with anybody, or kee! it to yourself. "ou can even tell all your friends you invented the model. I don#t care. "ou are com!letely free to incor!orate as little or as much of this as you see fit into your trading style. I only want you to make money. I believe that by showing you this method, you can give yourself a very !rofitable income. $lthough I can be the one who relays the method to you, make no mistake, you are the one who has to convince yourself to im!lement the method and finally !ush the button. It is not my intention to convince you that %Tunnel Trading% is the way to trade. That &ob belongs to you through research on your favorite currency !air or !airs. 'istorical data doesn#t lie. It is there for every single one of us to e(amine. Every !enny you make, you richly deserve. )ithin a very short !eriod of time *!erha!s a month+ you will come to think of tunnels as your own. ,or those of you who already make a nice living trading fore(, I salute you for your efforts. Perha!s you will discover an idea or two that can increase the !rofitability of your own trading. I ho!e so. ,or those who want to make a nice living trading fore(, I also salute you for your efforts, but in a different way. "ou are looking for something better, and that desire and !assion is hard to ignore. I ho!e you are very ske!tical of this method. "our ske!ticism is one of your biggest assets, yet through your own research you will discover the !ower of tunnels. Take the time to let the information sink in, so that you understand the theoreticals behind the method. -ive yourself as much time as you think necessary before trading tunnels. If that means trading a demo account before real money, then by all means go ahead. .efore I start, I am going to give you the only bit of !rofessional trader advice I have for you in this entire document. One, investigate a method that you believe makes money over time and stick with it *whether it#s tunnels or something else+. Two, try to understand the theoretical under!innings of the model. Three, trade small until totally

convinced method works. ,our, your success *!rofits+ comes from im!lementing the method correctly, not guessing where the market is headed. ,ive, read number / again. 0i(, give u! thinking during market hours. Thinking comes when the machines are turned off, not in the heat of battle. 1arkets are to be reacted. .efore I !roceed, !lease read the last !aragra!h again until you fully realize what it says. I#m not trying to be cute, I#m deadly serious. O , let#s get down to business.

I. INTRODUCTION
1y trading career started in the summer of 2345, when I !urchased a 1id$merica 6ommodity E(change membershi! , in 6hicago, for 74,555, and funded my account with 725,555. It was literally every !enny I had in the world. )hen I hit the floor, I thought I knew everything. .uy low, sell high 8 wave my hands around 8 !ocket some cash 8 9uit at 2 !m8 !lay golf in the afternoons in the summer8 basically live the trader dream. The first few months went well trading the mini8gold contract the e(change offered. .y October, I had roughly 7:5,555 in my account. .ut it was all seat8of8the8!ants trading. On a ,riday in mid8October, with three hours to go to the close I started winging around bigger numbers. .y the close I had lost 72;,555. 1y account was now at 72:,555. I s!ent 0aturday in a fetal !osition. I was so mad at myself. -ood thing I had no shar! knives in the kitchen or owned a gun. .y 0unday, it dawned on me that I could never allow this to ha!!en again, because it was sim!ly not !rofessional. 'ow can a !ro allow this to ha!!en and still call himself a !ro< In the long8run, if I didn#t change, if I didn#t change my trading !aradigm, if my mental !rocesses didn#t change, it would ha!!en again. $nd who knows, will ne(t time be worse< I later came to realize this loss as my trading Ph=. tuition. Over the coming months, I investigated every system and model known to man. I learned very fast on the trading floor that trading disci!line is the number one ingredient to !roduce !rofits. I asked around, and eventually bugged the hell out of bigger traders to share some of their secrets. )ithin a year, !eo!le were looking for me. $fter the 1id$m, I went over to the 6hicago 1ercantile E(change *61E+ in late 2342. They had currencies. The rest is history. The Tunnel 1ethod I am giving you is the culmination of >5? years of research and trading. It worked then, it works now, and it will work in the future. I believe it works best in currencies and the 0@P futures contract.

II. GENESIS OF THE TUNNEL MODEL: THE DREAM

It is not my desire or intention to make you a local *!rofessional trader on floor of

e(change+. )ith the way s!ot fore( is traded today *: 8 A !i! s!reads+, you can#t do what most of those guys do anyway, which is scal!. In case anyone hasn#t told you, scal!ing s!ot fore( is not the road to riches. There is not a single rich !erson in the world who got that way by scal!ing the Euro, or any of the other s!ot !airs. 0o why would you want to make scal!ing your main trading goal< "et, an understanding of what a good local looks for in a model will !rove e(tremely hel!ful. Botice that I always use the term %model% and not system. 0ystem connotates a !rogrammable black8bo( that can be mechanically traded for um!teen billions in !rofits. )ould you be shocked to hear me say no such system e(ists< )hat does a local look for in a model< 1ost locals are men, who have very e(s!ensive girlfriends andCor wives. 'alf the floor !o!ulation are either alcoholics or drug addicts. They don#t live in !ublic housing either, but in the ritzy suburbs. They wouldn#t be caught dead in any domestic8made car. Their kids get allowances bigger than what most adults make for a living. In other words, they need current income. 0o, whatever your model may be, it does a local no good if it makes him money D months from now, and makes him nothing today, tomorrow, or this week. "et, most locals want very much to build their account over time. 0o, it would be nice if the trading account could grow by 25E or more !er month over time, over and above what#s needed to live and !lay. Oh yea, and !lease limit the risk. Bo big drawdowns. 0o far, I think I can assume that all the things a local wants from a model are the same things you want sitting at your com!uter screen. .ut there is one more thing a local wants that I am willing to bet you have never thought of once since you started trading. I think most !eo!le have at least heard of $lbert Einstein#s famous e9uation e F mcG>. I believe I could argue it is the most im!ortant e9uation in history. 6ertainly in the >5th century. It#s ramifications are immense. It came about because Einstein thought outside the bo(. If you had the ability to !ut a gun to the head of all very successful traders, you would discover the gold thread that runs through every single one of them. They to have an e9uation. Hike Einstein, !ractically all of them think outside the bo(. There e9uation is !rice F information. This might sound strange to you, because right at this instant your brain is trying to 9uantify &ust how this works. $ll successful traders have disci!lined methods by which they trade. Their methods are as diverse as the !eo!le themselves. "et, at that instant when EVEI" trader in the world !ushes the button for a trade, $HH traders are in the same boat. Everybody is at ground zero the instant a trade is !ut in !lace. 0uccessful traders will now translate !rice changes into information. O!inions no longer matter. O!inions are already given weight in how the model is constructed, so why would you now want to contradict something you have already given considerable brain

!ower< Therefore, if a !osition goes awry and starts to lose money, they e9uate this into !owerful information that the !osition is wrong and must be changed. In the final analysis, the losses are relatively small. )hen we e(amine the fli! side, the information is translated into a winning !osition. This is what I call a %free trade%. Bow, it#s like sitting at a !oker table with a royal flush. "ou can#t be beaten. $ll successful traders will em!loy a strategy to let these !rofits run. If you currently are not letting your !rofits run, then you are cheating your account. If I#m a local, I want to make a lot of money, *let my winners ride, cut my losses very short+ and have as little risk as !ossible. I want all this wra!!ed u! in my method of trading. I want it sim!le, and I want it to be understandable. =o you want the same thing< 'ere it is.

III. THE TUNNEL METHOD

0te! 2. ,irst, you need a charting service. 0ince most all electronic trading !latforms have charts with technical indicators, this shouldn#t be a !roblem. 6reate a 2 hour chart on whatever currency !airs interest you. .archarts or candlesticks really make no difference. Overlay on this : thingsJ 2K a 2D3 !eriod *2 hour+ ema *e(!onential moving average+, >K a 2// !eriod *2 hour+ ema, and finally :K a 2> !eriod *2hour+ ema. The 2// and 2D3 ema#s create what I call the %tunnel%. The 2> ema is an e(tremely valuable filter that you will want to have there all the time. I will talk more about this in the filter section. 0te! >. 1emorize or write down and kee! ne(t to your trading screen the following fibonacci number se9uenceJ 2,2,>,:,A,4,2:,>2,:/,AA,43,2//,>::,:;;. ,or trading !ur!oses, the numbers of interest are AA, 43, 2//, >::, and :;;. 0te! :. )ait for the market to come into the area of the %tunnel%. )hen it breaks $.OVE the u!!er tunnel boundary, you go long. )hen it breaks .EHO) the lower tunnel boundary, you go short. 0te! /. 0to!s and reverse are !laced on the other side of the tunnel. 0te! A. $s the market trades in your direction, you take !artial !rofits at the successive fib

numbers res!ectively, with the final !ortion of your !osition left on until one of the following conditons occurJ 2K market hits the last fib number *:;; !i!s+ from the ema#s, or >K the market eventually comes back to the tunnel and violates the other side. E(am!leJ -.PCL0= is trading at 2.4A55. The ema#s are as followsJ 2//8 2.4/3/, 2D38 2.4A2>. The market breaks 2.4/3/, and you sell at 2.4/3>. "our sto! and reverse is now at 2.4A2>. Over the following hours, market starts to go down. /5 minutes after you !ut !osition on, cable is at 2.4//5. "ou can use for com!utation !ur!oses either tunnel boundary or the median of the tunnel. Ema#s are still the same, so if you use the median, AA from 2.4A5: is 2.4//4. "ou should have taken !art of the !osition off at 2.4//4. 1arket does nothing rest of day. 0to! can be moved down to !rotect !osition or left alone at tunnel. "ou are now looking for !rice to be 43 !i!s away from the ema#s. 0ince AA was already !assed, it no longer concerns us in this cycle. $ cou!le of days later, cable is at 2.4:55 and the median of ema#s is 2.4/25 *2.4/55 8 2.4/>5+. "ou should be out of another !ortion of the !osition at 2.4:>2. 1arket bottoms here and in the ne(t > hours, cable screams to 2.4A:A. "our remaining short !osition is covered at u!!er tunnel boundary of 2.4/>5, and you are now long from this !oint as well. 0ince you are long, you would now take !artial !rofits at 2.4/;A and 2.4A53. This is a fairly ty!ical e(am!le. If you were to &ust stick to this basic model, you account would grow very well over time. Has Vegas was built with far fewer !ercentages in the casino#s favor. In 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 !osition.. On the other side, you take some 9uick !rofits at the AA level which satisfies the scal!er in you, and you have !ositioned yourself for bigger !rofits in the long run should the market kee! going in your favor. .y definition, you are letting !rofits run. The $chilles heal of this model is when the market cho!s around the tunnel and gets you in and out multi!le times for small losses. I will cover how to deal with this in the filters section. That#s it. This is the model. ,airly sim!le in its design, and easy to remember. 'as all the things every local wants in a model, e(ce!t the 9uick > !i! scal!s, which you can#t do anyway. 6uts losses, and lets !rofits run. "et for its design sim!licity, the thought behind is more com!le(. Time to talk about that.

IV. THEORETICALS OR EVERYTHING HAS A REASON PART 1. THE TUNNEL

)hy 2 hour charts< 0maller charting !eriods lead to more false !ositives, which translates into more losses.

.y 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. Honger term charts, like daily and weekly !roduce to much sli!!age in market !rice for the final !ortions of the !osition. In the fall of >55/, when -.PCL0= went >5 handles u! to 2.3A, the daily ema#s were A to ; handles behind. ,or me, this is to much to give back on a long !osition, es!ecially when your first !rofits came at AA, and 43. > hour and / hour charts are roughly analogous, but I !refer the 2 hour chart for its sim!licity, and sometimes it#s tough to see how a market trades in a / hour !eriod. )hy 2// and 2D3 2 hour ema#s< It#s all about momentum over the short to medium term. Hower ema#s !roduce momentum signals that give trading signals that are to short8term to trade !rofitably. In other words, the dreaded whi!8saw. It may go in your direction for : minutes and D !i!s, then it rolls over and crushes you. 'igher ema#s !roduce momentum signals that are to long8term and as a result you get > trading signals every : years. This isn#t very good either because while you are waiting, the market is going handles in a direction without your !artici!ation. There is another reason. ). =. -ann -ann was big on s9uares, s9uare roots and the inter8relationshi! between !rice and time. I am not a -ann disci!le, but you can#t &ust dismiss his work as &unk. $fterall, the guy made 7A5 million between 2325 8 23A5. 'e deserves res!ect, even if you disagree with his methods. 0o, 2// is the only fib number that has a whole number s9uare root *2>+. The closet fib number to this s9uare root is 2:. The s9uare of 2: is 2D3. The tunnel is now created. .ut, the !roof is in the !udding. In a trending currency market *which is what it does most of the time over the long run+, retracements are where you can re8establish !rofitable !ositions. -o back and look on the 2 hourly charts and see where the retracements sto!, and you will need to know nothing more about -ann or numerology, astrology, or anything else. They sto! very close, if not e(actly on the 2// and 2D3 2 hour emaM the tunnel.

PART 2. THE FIB NUMBERS

Everyone should know that all moving averages are lagging indicators. It makes no difference the ty!e, they all lag. Only after the fact can they tell you the market has turned. Even though that is valuable information and is acted u!on by taking a !osition, it isn#t going to hel! you much in getting the best !rofit !otential out of your trade. If you use them e(clusively to then get out, you will discover > thingsJ 2K you get cho!!ed when you had a !rofitable trade at one !oint, andCor >K they took you out on a retracement and now you don#t know what to do.

I can sum u! everything you need to know about fib numbers and the corres!onding fib ratio of 2.D24. Bature and the !hysical universe loves them. They are everywhere from the !yramids, to mountain ranges, seashells, forests, etc. 0o why not markets< ,ib numbers are real8time. This is not a lagging indicator here. )hen a market hits a fib number from the current ema#s, it is telling you that here is a natural sto!!ing !oint, !lease take some !rofits off the table. )hen a market goes through a fib number, like a hot knife through butter, it is giving you further information about momentum in the move. 6urrency !airs that are relatively more volatile than others will e(!erience the higher fib numbers more often than the less volatile !airs. Of the ma&or !airs, -.PCL0=, and L0=C6', are the most volatile followed by the ELICL0= and then L0=C"EB. Therefore, I trade the -.P and 6', because they go to e(tremes more often than the other !airs. These e(tremes *>:: and :;;+ !roduce who!!ing !rofits on a regular basis. It is rare to get the Euro to the >:: mark before it crosses back over the tunnel. It &ust ha!!ened here recently, but if you go back weeks, months, and years, you will see that e(!ecting this to ha!!en often isn#t !robable. Bot the case with -.P and 6',. The higher fib numbers really are giving you that im!ortant e9uationJ !rice F information. They are screaming e(haustion. If you do the work in your currency !air, you will see that the market action after hitting these levels almost always involves retracement or the start of a bigger move in the o!!osite direction. Is this not valuable information< ,or those of you who wish to trade less volatile !airs, you may want to include the :/ level in your !rofit8taking. In this case, if you don#t, you may be giving u! to much by letting this level !ass.

PART 3. THE FILTERS

,ilters are used to increase overall !rofitability andCor reduce overall losses. If a filter does not do one of these two things, then I do not use it. )hat good is a filter if it raises your !rofitability by 25E but only gets you into 2C: as many trades< )hat good is a filter if it reduces losses by 25E 8 >5E , but also reduces !rofitability on every trade by half< I think you get the !oint. 'ere are the filters the vegas team uses. *"es, I have a team. There are : of us. )e trade -.PCL0=, L0=C6',, and the 0@P e8mini futures contract. Each has a s!ecialty. 1ine is -.PCL0=. )e are each res!onsible for our main !air. One of us is always at the screen when markets are o!en. Positions are covered by other !artners when away. )e only tunnel trade.+ 2.K Put the 2> ema *2 hour+ on your screen with the rest of your indicators. )hen everything is at the same !rice *tunnel, current market !rice, 2> ema+ sit u! and take notice. )hen

the market breaks away from the tunnel, there is a very high !robability of a strong market move coming. I don#t need -ann, because this gives me time, the s9uare of time, and !rice all in e9uilibrium. )hen it breaks, it goes. Beed !roof< )ell, go back on your favorite currency !air and check it out. In the first 9uarter of >55A, this filter alone !roduced >5 trades, 23 which were !rofitable in L0=C6',. In fact, as I write this, 2 trade is still on from about : handles ago. 0ince I am not res!onsible for 0wissy, I#m not the guy !ushing the button, only monitoring it when I#m at the screen *changing sto!s when needed, etc.+. .ut, the !osition is still on. This filter is so !rofitable, we increase the size of our trading !osition when we see it develo! and then ha!!en. )hen you go back and check it out, you will notice many times how it &ust misses a move by a few hours. It is an e(tremely !rofitable filter. )e also define %same !rice% as being within A !i!s or so of being e9ual. 0ometimes it turns out the signal is e(act, but I don#t think you have to s!lit hairs on this. )ithin A !i!s is good enough for us. >.K )e do not initiate new currency trading !ositions based on tunnel trading during the $sian time8frame. $nything between A!m B" and 1idnight B" is ignored for entry of new !ositions. Positions that are on are monitored as normal, i.e., everything else is the same. )e will take !rofits if fib levels are hit. If we miss a move, then we miss a move. $ missed move is &ust an o!!ortunity cost. 6ho!8cho! in $sia will eventually cost you more money than it is worth. :.K Bews days that can have a significant affect on !rices are ignored. That#s right, we ski! them for entry of new !ositions. 6urrently there is only 2 day !er month which 9ualifies, and that is L0 Bon8,arm Payrolls *B,P+ which comes at 4J:5 am B" time the first ,riday of each month. Positions that are on are monitored as normal. /.K )hen the tunnel is very narrow *most of the time+, do not &ust !ut sto! on the other side of tunnel. If you do you get whi!sawed to death. Lse the hourly charts and the most recent hours of su!!ort 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 trendlines, triangles, flags, !ennants, and su!!ort and res. levels, then go get the eduation and come back. 0im!le but necessary advice. I don#t mean to infer that &ust because you know this technical stuff it#s going to be a walk in the !ark. It#s not. Het#s make one thing !erfectly clear. EVEI" model has its vulnerable s!ot that seem to increase losses. ,or tunnel trading, this is one of the

scenarios. Putting in the right sto! is an art, not a science. A.K )e look for clean moves *2 bar+ through the tunnel. This means your into !rofits almost from the get8go. "ou will not always get the clean moves. The longer the market stays in the tunnel cho!!ing around, the higher the !robability our entry decision will be made on a break of su!!ort or res. instead of the tunnel boundaries. D.K )e do not trade minor *contra8ma&or+ trend signals in a strong u! or down market !rice trend. If the -.PCL0= is in a strong !rice u!trend, we will not initiate new short !ositions on a break of the lower tunnel boundary. )hy< .ecause the !robability of success in getting !ast AA from the ema is not very good. Past history tells us that, so I#m not looking to be the hero here and say %This time it#s different.% )hen market comes back through the tunnel on the u!side, we will get back in on the long side. If I have to tell you when the market is in a strong !rice move, I don#t think you have been !aying attention to the !rice movements of late. In a range8bound market, which we define as a market between : 8 A handles *or lower+ in a A week time8frame, we trade both sides. Bow, that#s all we use. 6an you use more< 6an you invent your own< 6an "ou change some of the definitions< "es, absolutely. Invent your own filters, use an Elliot )ave filter, anything you think will hel! your trading.

V. SUGGESTED MODEL SYSTEM

=o I really need to mention money management< I didn#t think so. $t a minimum you should be able to do : units to im!lement tunnel trading. Lse the AA, 43, and 2// levels to take 2C: off at each level. If you can do / units, use AA, 43, 2//, and >::. A units is the !referable level, and you use AA, 43, 2//, >::, and let one unit ride until crosses over tunnel boundary or it reaches :;;. Of course, you can make your units any size you want. ,or smaller traders, a unit size may be 25,555. If you do not have the money to trade :5,555 of something, then I would advise you to save u! and come back when you do. If your account has 7>,555 in it, you can easily im!lement tunnel trading with 25k units. One of the greatest advantages of this model is its fle(ibility in its design to allow you to choose the level of riskCreward you desire in trading. "ou can make this as aggressive or as conservative as fits your style. I will give an e(am!le of each. These are &ust e(am!les,

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 a!!ro!riate level for yourself. E(am!le 2 8 Very $ggressive Tunnel is !ivot level for buyCsell. $bove tunnel, buy breaks, sell at fib numbers. $t >:: an :;;, fade the move for retracement. .elow tunnel, sell rallies, buy at the fib numbers. Lse !revious fib numbers in the move as sto! loss !oints. This is very aggresive, and woul be a!!ro!riate for very short8term traders who have a time8frame of day8trading. E(am!le > 8 Very 6onservative Lses basic tunnel system with 2> ema. Only initiates on this signal. Hooking for best !ossible !robability trade. )illing to give u! more !rofitability in return for less risk. Trades three units. Lses fib numbers AA, and 43 for 2C: each. Heaves the other unit on until >:: or market !rice crosses over tunnel boundary. $llows trader to catch short8term *28A day+ !rofit !oints, and also allows himCher to ride the ma&or trend if one develo!s. Hike I said, these are &ust two of an infinite number of riskCreward senarios you can develo! using this model. This is not some rigid system, where you have to do this or that. It is ada!table, 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 !eo!le who have transformed this into a model you wouldn#t recognize without knowing what tunnel trading offers. )hen you get right down to it, once you have ada!ted it into your own trading style and !ersonal risk model, tunnel trading will give you all you want. 1omentum to catch the bigger moves over time, early !rofit !oints that allow you to catch short8term movements, and the lowest risk you can !ossibly have in a trade, because you are only risking 25 8>A !i!s on each trade. If your odds of success on each trade were A58A5 *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 fle(ibility tunnel trading is the best model I have ever seen.

VI. YOUR HOMEWORK

"ou really need a good charting service to go back and look at the history of the currency !airs you trade. I have mentioned several times of f(trek on the fore(news forum. If you have another, great. .ut for those of you who only get their charts from the trading !latform where you trade, most will not allow you to bring u! historical data. "ou can get a free ;8day demo of intellicharts at www.f(trek.com. They only do fore( charts. They offer s!ot fore( on dozens of currency !airs, with hundreds of technical indicators over the last :5 years, with any time8frame you want. Therefore, you can go back and look at :5 years of 2 hour charts on whatever !air you wish. $fter ; days the !rice is L0

7255Cmonth. If I was in your shoes, I wouldn#t make a trade without some kind of validation that what I have said really is true. That is why I am asking you to do some kind of historical homework on the 2 hour charts. "ou can see for yourself what tunnels do, and why the fib numbers are so im!ortant.

VII. I STOP BUT IT'S NOT THE END

I could ramble on about a lot of things regarding the tunnel method, but you now have the basics to get started. Once you get your trading style and risk model defined, you can start thinking about additional filters and signals for refinement. Of course, you are free to use the model the vegas team uses as well. I would like to end by giving you my e8mail address. It is trafficca!Nhotmail.com Please feel free to e8mail me anytime. I will res!ond as 9uickly as life allows me. I ho!e I have been of some hel!. ,or some I ho!e this has o!ened your eyes to a model that delivers. ,or others, I ho!e you have !icked u! an idea that may be of use in the future. ,or those who think I#m nuts and full of GGGG, that#s O too. I think I may have stood ne(t to you in the !its. "our screamings have always !rovided humor. .est of trading, Vegas