Tunnel Indicator is a technical tool that assists traders in determining the direction of the trend as well as providing levels for entering and exiting trades. Sometimes, traders may make the mistake of trading short-term moves while ignoring longer-term price action trends. This indicator is based on long-term moving averages, and it can be used to detect long-term trends in the Forex market.
What is the Tunnel Indicator?
The Tunnel Indicator is a technical indicator that consists primarily of two significant moving average lines, as well as six additional MA smoothing lines. The Tunnel indicator is made up of eight lines. Six of them are filled in red by default, with the remaining two in green and blue. The green MA is labeled MA1, and the blue MA is labeled MA2. MA1 is the 144-period moving average, while MA2 is the 169-period moving average. During significant market sessions, the Tunnel indicator can act as a price support/resistance channel.
Tunnel Strategy
The Tunnel Strategy consists of 8 bands with varying parameters. The top four bands act as potential areas of support because price frequently bounces upwards from these levels, creating opportunities to go long. These levels can also be used to define market bullish breakouts. The last four bands at the bottom act as resistance levels, and prices frequently jump downwards from these areas during a bearish trend. You can also decide to place a sell stop just below the bottom band to activate your sell entry with a potential bearish breakout setup.
The simple average of the closing price is used to calculate moving averages. The short-term moving average indicates the intraday trend, while the long-term moving average indicates the market’s long-term trends. When the moving average 144 rises above the moving average 169, traders could look for long opportunities, and when it falls below the moving average 169, traders could look for short opportunities. Upper and lower tunnels are drawn in conjunction with moving averages, which can be used as support and resistance.
Buy Signal
The following could be your checklist for a buy trade:
- When price trades above the 144 and 169 moving averages.
- When the slope of the moving averages is up.
- When the 144 MA is above the 169 MA.
Once these three events occur:
- You could open a buy position after a breakout of the upper band occurs and you get your signal confirmation.
- You could set your stop loss just below the nearest swing low.
- You could set your take profit at the nearest resistance zone.
- For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Sell Signal
The following could be your checklist for a sell trade:
- When price trades below the 144 and 169 moving averages.
- When the slope of the moving averages is down.
- When the 144 MA is below the 169 MA.
Once these three events occur:
- You could open a sell position after a breakout of the lower band occurs and you get your signal confirmation.
- You could set your stop loss just above the nearest swing high.
- You could set your take profit at the nearest support zone.
- For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Tunnel Pros & Cons
Pros
- As it is based on long-term moving averages, the Tunnel Indicator can help traders ride long trends without exiting too quickly.
- This indicator can also act as dynamic support and resistance levels.
Cons
- The Tunnel Indicator may not meet the trader’s expectations in a consolidating market.
- The fact that it is the upper lines that serve as support while the lower lines serve as resistance could be confusing sometimes.
Conclusion
The Tunnel Indicator, composed of multiple moving averages, tries to provide signal indications for trend continuation and gives potential support and resistance levels for traders to use. Traders may confirm the signals given by this indicator before leaving their positions to run for long and it is paramount to pay keen attention to money management.
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