Full Review of Teodosi’s Moving Averages Tunnel System for Binary Options Trading
You might have read about my review of Teodosi’s other strategy, Teodosi’s simple system, here on BOTS. If you haven’t you should check it out too! This strategy is also assembled to be used for trading forex and you can find it on forex-strategies-revealed as well. Don’t worry though, I’ve binary-option-ified this strategy for you. Yes, I just made that word up, I think we need a word like that! Anyway, once again Teodosi invades our charts with his second profitable strategy. Let’s see what he has to offer us this time!
How does the Moving Averages Tunnel Strategy Work?
Teodosi recommends that we use the hourly chart as M30 and time frames below can result in fake-outs. First we need to add two EMAs, 18 and 28, both red in the picture. Then we add two Linear Weighted Moving Averages (WMA), a blue 5WMA and a yellow 12WMA. Lastly we load RSI (21) with level 50 only. The two red EMAs will form a tunnel which indicates that a trend is about to start or about to end. The two WMAs will pinpoint entry locations within the trend. We start looking for an entry when the red EMA tunnel becomes narrow, meaning EMA 18 attempts to cross EMA 28 from either above (start of a downtrend) or below (start of an uptrend). After confirming the red tunnel is narrow or has crossed, we can look for entries. For a valid call option RSI must be above 50 and the WMAs must’ve crossed the EMA tunnel upwards. In case the 5WMA has also crossed the 12WMA upwards we can assume the signal is extra strong. For a valid put option the RSI must be below 50 and the WMAs must’ve crossed the EMA tunnel downwards. Also here if the 5WMA has crossed the 12WMA downwards the signal has a higher probability being correct.
- RSI must be above 50.
- First confirm that the red tunnel is narrow/crossed (18EMA crossing 28EMA from above).
- Wait for 5 and 12WMA to cross the red tunnel upwards, then enter the trade.
- RSI must be below 50.
- First confirm that the red tunnel is narrow/crossed (18EMA crossing 28EMA from below).
- Wait for 5 and 12WMA to cross the red tunnel downwards, then enter the trade.
As always with trading, there is the problem of choosing the right expiry. I think the focus should be on what the market looks like, pay attention to the volatility and also look further back in the chart, history plays a big role most of the times. I’ve said it before and I’ll keep saying this, adding price action to your analysis will improve picking entries and expiry. Drawing trend lines starting on higher time frames and going all the way down to at least the time frame you are trading, H2 in this case, can help with accuracy. Doing so will cancel out many fake-outs and choosing the correct expiry time will be a much easier task. Look at the picture above, if a trend line was drawn from the highest point for example, starting from the left and down to the lowest high (the first exit up-arrow) you could easily see when the trend is being broken, thus giving further confirmation that the trend is changing direction. This way you wouldn’t solely rely on EMAs to decide whether you should trade or not.
However, since the H2 rarely produces any signals I recommend using M5 or M15 timeframe instead.
Why does the MA-Tunnel Strategy Suck?
The main problem is, when I looked at the charts to back-test, that EMAs can produce several fake signals. They get entangled and the two WMAs cross them too, giving the impression that a trend is about to start. You would check the RSI and everything looks good so you enter but the trend completely reverses on you. Waiting for a signal to be triggered on the H2 time frame can be time consuming. During some days you just might not get any signals at all!
Why doesn’t the MA-Tunnel Strategy Suck?
EMAs are good for identifying trends and RSI is a powerful indicator. Using this strategy with the help of Price Action and on a lower time frame you’ll find plenty of good setups to trade. The strategy itself is easy to understand and use so newbies can try it out as well.
Is There a Light at The End of The Tunnel?
At the moment of writing my conclusion I’m watching the M5 charts of EUR/USD and I can see how I could have found a couple of good entries with this strategy that would have resulted into clear wins. I can also see how Price Action would’ve helped me avoid a few fake signals! As I mentioned before; EMAs can give false signals. Therefore it’s important to have yet another way of making sure that the entanglements of the EMAs are truly due to trends being formed. This is why trend lines are important and you shouldn’t trade without them! There may not be so much light at the end of the EMA-tunnels but there sure can be lots of pips in your favor, if you take my advice on using price action and trend lines of course. To sum it all up; try Teodosi’s Moving Averages Tunnel strategy on different time frames and for best possible entries make sure you draw support and resistance-lines.