Vegas Tunnel: A Strategic Tool for Right-Side Market Trend Analysis

BeginnerSep 14, 2023
In any market, optimizing time is of utmost importance in long-term investments. For investors who need more time to monitor the market constantly, it is essential to determine the market trend before entering. Using the Vegas Tunnel, investors do not need to constantly monitor the market, yet can reap decent profits in long-term investments
Vegas Tunnel: A Strategic Tool for Right-Side Market Trend Analysis

The Inventor of Vegas Tunnel

The Vegas Tunnel was invented more than 10 years ago by a forex trader named Barry Haigh, nicknamed “Vegas.” This resulted from over 20 years of research he undertook after a wrong trade in 1980 led him to lose $17,000. Determined to find a trading system suitable for himself, he eventually made his findings public.

Initially, the Vegas Tunnel was applied to the one-hour candlestick chart of forex trading. Later, Barry Haigh improved it and applied it to larger time frames, such as four-hour and daily charts, making it equally suitable for the stock market and the cryptocurrency market.

Concept and Usage of Vegas Tunnel

The core of the Vegas Tunnel is the Exponential Moving Average (EMA), which uses statistical methods to give more weight to recent data in a specific time frame, calculating the weighted average price used to determine the trend of a security or asset.

According to Barry Haigh, the Vegas Tunnel consists of 144EMA, 169EMA, and 12EMA. The 144EMA and 169EMA form a “tunnel,” and the 12EMA acts as a “filter” to filter out noise and increase the success rate.

When the price breaks through the upper band of the tunnel and the 12EMA also crosses the tunnel to the upper side, it is a buying signal. Investors should look for opportunities to buy when the price retraces or approaches the upper band of the tunnel. Conversely, when the price breaks through the lower band of the tunnel and the 12EMA also crosses the tunnel to the lower side, traders should sell when the price bounces back to the lower band of the tunnel.

As a short-term EMA, the 12EMA helps determine whether the price is experiencing a false breakout or breakdown. If the 12EMA has not crossed the tunnel, there is still a possibility of a false breakout or breakdown.

Major Case Example

Consider the daily trend of Bitcoin at the start of 2023. The white circle shows that shortly after the price surged above the Vegas tunnel, the 12EMA climbed above the tunnel, while the Bitcoin price experienced a slight decline. Theoretically, this moment represented the optimal buying opportunity.

The two yellow circles indicate that, although the Bitcoin price broke through the Vegas tunnel, the 12EMA filter did not dip below the tunnel. As a result, the price later regained momentum and rose above the Vegas tunnel again, indicating a false breakout. Therefore, there was no need to sell Bitcoin.

If a trader had purchased Bitcoin when it was between $20,000 and $21,000 in mid-January, as indicated by the white circle, and held onto it until early August, when this article was written, the price would be $29,000. Without any signs of the price and the filter dropping below the tunnel, they would have made a profit of at least 40%.

Small-scale Case

Since it often takes several weeks or even months to encounter a good trend at a larger scale, medium and short-term traders can look for trading opportunities at a smaller scale (e.g., one hour). For example, as shown in the white circle in the image above, the price of Ethereum stood above the upper band of the Vegas tunnel at the end of October 2022, indicating the end of the downtrend. This was also a good opportunity to go long on Ethereum, with the price around 1340 USD at the time.

Within less than a day of standing above the tunnel on the 12EMA, the price of Ethereum increased accordingly. If traders followed the principles set by Vegas and waited until the yellow circle, when the price of Ethereum fell below the tunnel and rebounded, i.e., when the price was 1480 USD, the spot profit of this trade would still be around 10%. The returns from going long on the contract would be quite substantial.

Vegas Double Tunnel

In addition to the single tunnel formed by the 144EMA and 169EMA, traders can add another tunnel formed by the 576EMA and 676EMA, creating the “Vegas Double Tunnel,” which is helpful in determining long-term trends.

The image above shows the daily chart of Bitcoin from April 2019 to August 2020. The light blue and yellow lines represent the Vegas tunnel formed by the 144EMA and 169EMA (referred to as “Tunnel 1”), and the red and orange lines represent the Vegas tunnel formed by the 576EMA and 676EMA (“Tunnel 2”).

Vegas Double Tunnel Golden Cross

Similar to the MACD’s golden and death crosses, the Vegas tunnel can also use golden or death crosses to determine trends. When, as shown in the white circle on the left side of the image, the shorter duration Tunnel 1 crosses above the longer duration Tunnel 2, a Vegas tunnel golden cross occurs.

At that time, the market was recovering after a full year of bear market declines in 2018 and the so-called “mini bull market” began to appear at the beginning of 2019. Although Bitcoin experienced a decline after the Vegas tunnel golden cross, the golden cross also signaled that for a long time afterward, the market would emerge from the bear market and re-enter the bull market.

Bitcoin’s price subsequently declined, but for the rest of the time after the golden cross in 2019, Tunnel 1 never crossed below Tunnel 2 to form a death cross. Therefore, when the Bitcoin price fell to the upper and lower bounds of Tunnel 2 during this time, it was a good opportunity to buy for the long term.

Although the “Black Swan” event caused by the COVID-19 pandemic in March 2020 led to a sharp drop in Bitcoin’s price to around 3800 USD, resulting in a brief death cross between the two tunnels in April, the price of Bitcoin quickly rebounded above the two tunnels, and the Vegas tunnel golden crossed again. In retrospect, this was an excellent buying opportunity that only comes once every few years. After all, since that time, the price of Bitcoin has never fallen below Tunnel 1 and has welcomed a new bull market in the following years (see below image).

It is worth mentioning that on the day this article was written in 2023, the two Vegas tunnel lines of the Bitcoin daily chart were almost forming a golden cross. The last time the Bitcoin daily chart had a golden cross was three years ago, right after the rebound from the significant drop caused by the pandemic. If we disregard this black swan event, the previous golden cross occurred four years ago at the peak of a minor bull market. For long-term investors, a good time to strategize is when the price retests the tunnel after forming a golden cross but does not break through.

Vegas Dual Tunnel Death Cross

Similarly, when a death cross occurs in the Vegas tunnel, it signifies that a long-term trend has been confirmed. The chart above shows the Bitcoin daily candlestick chart during the bull market peak of 2021 and the bear market of 2022.

In the red circle shown in the chart, it can be seen that after the Vegas tunnel death cross formed in June 2022, the prices for the entire second half of 2022 were suppressed by the two tunnels, forming a bearish trend, until January 2023, marked by the yellow circle, when it managed to get back above the Vegas tunnel.

However, when the red circle death cross occurred, the Bitcoin price had already fallen from a peak of $69,000 to a region of around $18,000 to $29,000. However, if traders bought Bitcoin at around $8,000 during the Vegas dual tunnel golden cross, which was after the pandemic, they could still have made at least double to triple their investment at that time.

However, theoretically, when the Bitcoin price falls below the first Vegas tunnel (white circle), and the 12-day EMA also falls below the tunnel, at $43,000 or $50,000, Bitcoin holders should sell their Bitcoin. This way, even if they didn’t sell at the peak, it would still be a considerable income.

Advantages and Disadvantages of the Vegas Tunnel

The Vegas tunnel is very useful for determining trends. From larger timeframes such as the daily and four-hour charts, after the Vegas dual tunnel forms a golden cross or a death cross, it often indicates that the trend in the following extended period will not easily change, either upwards (golden cross) or downwards (death cross). In the case of a golden cross, buying spot or opening a low-leverage long contract when there is a minor retracement to the tunnel, and setting a stop loss, will allow for steady holding of positions without the need to monitor the market constantly.

Since it is an indicator composed of moving averages, it also has the disadvantage of lagging. In larger timeframes, once a golden or death cross occurs, it indicates that the market may have been active for a while, and the profit from entering at that time will be less than entering from the beginning. Therefore, it is a right-side indicator for determining trades, but it is relatively safer and easier to set stop losses.

Conclusion

Whether you are a long-term investor looking to buy spot assets or a trader pursuing short-term profits, you can use the Vegas Tunnel to determine trends and find appropriate entry points.

However, for long-term investors, daily trends are rare and may not be encountered even once a year at a higher level. Therefore, investors must regularly monitor the market and maintain patience. Moreover, before a market trend appears or after a golden cross or death cross occurs, the market may experience frequent fluctuations before a major trend emerges. Therefore, long-term investors must enter the market in batches.

Short-term investors can also explore trading opportunities through smaller time frames (such as hourly). However, remember that there are more variables at smaller levels, so it is best to combine other patterns and indicators. When there is additional evidence to support your view, you can be more confident in profiting from the trade.

Author: David
Translator: Piper
Reviewer(s): Edward、KOWEI、Elisa、Ashley He、Joyce
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