The Most Classic Trading Strategy: The Vegas Tunnel

More than a decade ago, a well-known hedge fund manager named Vegas publicly revealed his trading strategy, which he named the "Vegas Tunnel Trading Method."  If you don't have your own trading system yet, you might want to give the Vegas Tunnel a try.

Two Tunnels

The first set consists of the EMA144 and EMA169, while the second set includes the EMA576 and EMA676. Each set of exponential moving averages forms a tunnel during price movements, which is referred to as the Vegas Tunnel. This tunnel holds significant guidance for the medium to long-term price trends.

The Vegas Tunnel (144, 169) serves as a watershed for medium and short-term trends in the market. It can guide direction and act as support and resistance.

How did he find these numbers? The answer is the Fibonacci sequence.

The Fibonacci Sequence

The Fibonacci sequence is a series of numbers in which each number is the sum of the two preceding ones, typically starting with 0 and 1. The sequence looks like this:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, ...

The Fibonacci numbers are often found in nature, art, and architecture, where they are associated with the golden ratio, approximately 1.618, which is derived from the ratio of successive Fibonacci numbers. This mathematical relationship is believed to represent aesthetic beauty and harmony.

 

Characteristics of the Vegas Tunnel Trading Method

1. Trend-following Trading: The Vegas Tunnel trading method is designed for trend-following, making it suitable for use when market trends are clear.

2. Clear Exit Points: This method provides well-defined exit points, allowing traders to accurately determine when to exit a trade to lock in profits or cut losses.

3. Filtering False Breakouts: The Vegas Tunnel trading method includes rules to filter out false breakout signals in the market, helping traders avoid common pitfalls and increasing the success rate of trades.

4. Easy to Learn: The rules and operational steps of this method are straightforward, making it easy for beginners to learn and master.

 

Filtering Signals

In defining the tunnel trading method, Vegas introduced the concept of breakouts.

What is the Concept of Breakout? A breakout occurs when the price moves beyond a predefined level of support or resistance, signaling a potential shift in trend. The filter line is represented by the 12-period EMA (Exponential Moving Average), which serves to filter out false breakouts in the market.

Role of the EMA12 Filter Line

The EMA12 acts as a filter to identify false breakouts. Here’s how it is applied:

• Conditions for Going Long: The price and EMA12 must simultaneously break upward through the EMA144 and EMA169 before considering a long position.
• Conditions for Going Short: The price and EMA12 must simultaneously break downward through the EMA144 and EMA169 before considering a short position.

This filtering mechanism ensures that we not only look at price breakouts but also reference the EMA12 signals to confirm the reliability of those signals. Only when the price and EMA12 signals align do we proceed with the trade; otherwise, it is regarded as a false signal.

 

Example of Filtering Mechanism Application

Bullish Signal Filtering: 

Suppose at a certain time, the candlestick price breaks above the medium and short-term Vegas Tunnel (EMA144 and EMA169).

If at that moment EMA12 does not simultaneously break upward through the tunnel, it is considered a false signal, and a long position is not entered.

Bearish Signal Filtering:

At another moment, the candlestick price breaks below the medium and short-term Vegas Tunnel (EMA144 and EMA169).
If EMA12 does not simultaneously break downward through the tunnel, it is also treated as a false signal, and a short position is not entered.