by Jea Yu, Co-Founder, Undergroundtrader.com

Do you agree with this premise?  A stock can be in an uptrend and a downtrend at the same time. 

If you answered, yes, then read on.  If you answered, no, then definitely read on.

Many traders tend to think in absolutes.  A stock is either absolutely in an uptrend or absolutely in a downtrend.  This thinking tends to make traders very rigid often blurring the line between conviction and plain stubbornness.  The reality is that a stock may be in an uptrend in a wider 60 and 13 minute time frame charts while simultaneously being in a downtrend on the 3 minute time frame chart.  This happens more often than not.  The diverging time frames is one of the main reasons why stocks tend to chop.  In fact, stock’s make their strongest moves when time frames are converging.  A stock will make its strongest, clearest and  most voluminous price moves when it is uptrending/downtrending on all 60,13,8 and 3 minute charts simultaneously.  In other words, the strongest movements come from converging time frames.  We called these setups “three lane highways”.  Therefore, the highest probability trades should be taken on converging time frames aka three lane highways.  This sounds pretty easy.  In many ways it is.  However, also understand this key premise:

The name of the game is to find transparency before it becomes too transparent.

By the time a stock is in full converging time frames, it will likely be too late to chase.  In fact, getting in on full converging time frames will usually means getting in near the top.  By this time, the transparency has already become too transparent.  So how does one make money from them?

Timing is everything.  The 60 minute chart is a bird’s eye view to gauge the overall trend.  The 13 and 8 minute charts are the intermediate trend.  When these three are converging and moving in the same direction, it is a matter of timing the 3 minute chart with the 1 minute chart for an entry.   When stocks trend, it is the 3 and 1 minute charts that exhaust first.  When these charts exhaust, they will usually test the supports or the 13 and or 8 minute charts.  If they hold the supports, then the 3 minute will likely resume the trend thereby setting up full converging time frames again for another powerful move.  The key lies in timing the entry on the 1 minute trigger and 3 minute chart.

In order to explain fully how to play three lane highways, I have to first give the parameters for the chart.  I utilize 5 and 15 period simple moving averages as my roadmap at the top of a chart with bollinger bands (20 periods and 2 standard deviations).  At the bottom of the chart, I add stochastics (%d= 15,3 and %dslow= 15,5,2) or my momentum indicator.   This basic chart is then duplicated on a 1,3,8,13, and 60 minute time frame (five total charts).  The moving averages determine trend and trend channels.  An uptrend has a rising 5 period ma and 15 period ma.  A downtrend has a declining 5 period ma and 15 period ma.  The space between the 5 and 15 period ma’s is the trend channel.  The stochastics is the momentum indicator.  When it oscillates up, it indicates buying momentum.  The 80 band is line a redline for an engine.  Stochastics that cross up through the 80 bands are usually nearing a peak on the upside move and indicates overbought conditions.  Stochastics that fall under the 20 band indicates an oversold condition near a bottom. 

When a stock is uptrending, it will usually hold its 5 period ma and continue to bounce off that level to make higher highs.  The stochastics will also indicate this by crossing back up or forming what I call a mini pup.  This is a condition where the lead stochastic (%d) stalls as the stock pulls back to the 5 period ma and then slopes back up as the stock bounces off that support.  This is a very strong pattern as it indicates strong buyer support and triggers a short squeeze bringing more buyers off the fence.  Mini pups usually target the upper bollinger bands for that time frame.   

With this basic understanding, let’s delve into the exact mechanics of playing three lane highways using an uptrending stock.

1)     Find a stock that is uptrending on the 60,13,8,3 minute charts.

2)     Wait out the movement until the stock exhausts and falls back under the 3 minute 5 period ma

3)     Watch the 13 and 8 minute 5 period ma support price level.

4)     If the stock tests and bounces back up off the 13 and/or 8 minute 5 period ma, then watch the 1 minute stochastics for a    bounce

5)     Enter long on the 1 minute stochastics bounce up as the stock pierces the 3 minute 5 period moving average

6)     Sell into the 1 minute full oscillation and or 3,8,13 minute upper bollingers bands

Here’s an example:

WFMI has a solid  60 (not shown),13,8,3 minute uptrend.  However, WFMI peaks out on the 3 minute chart at 11:57am and falls through the 5 period ma to lean to 50.80.  The 13 minute 5 period ma support was at 50.88.  Once WFMI bounced, the 1 minute charts made a 20 band cross up taking the stock back through it’s 3 minute 5 period ma at 51.10.  This triggers the LONG entry at 51.15 as the 3 minute stochastics crosses back up also as it realigns again with the 60,13,8 minute uptrends. WFMI eventually squeezes up through 52 on that entry. 

This is a great example of how to step in the two lanes ahead of the third lane to complete the three lane highway.  As you can see, when the 3 minute stochastics crosses back up, WFMI bounces hard to new highs on heavy volume.

Converging time frames have the highest consistency movements in the market.  Time your entries carefully and pull the trigger to reenter uptrends.  Good trading gang!

A trader has to decide which type of trading he is engaging in.  A swing trader will use wider stops for wider targets with smaller share size to absorb the wiggles.  A scalper will use smaller targets and smaller trails stops with an emphasis on heavier shares to maximize the short term gains.

Despite popular beliefs, scalpers tend to be more risk averse.  Scalpers believe the longer they are exposed in a position, the more liability and risk he takes on.  A scalp is a trade that is placed for a profit resulting from a straight fast move from point A to point B with very little wiggling in the middle.

Swingers on the other hand tend to look at the bigger picture.  They feel that it’s not worth it to time every single little move and don’t mind holding positions longer for a move from point A to point D with a lot of wiggles and chop in the middle. 

These are the two main styles of traders.  The scalpers are like the punchers (Mike Tyson).  The swingers are like the pure boxers (Lennox Lewis). 

Bottom line:

1)     Trading environment is more important than methods alone.

2)     Limit trading to the fertile period the hour after market open and the hour before the close.

3)     Trade heavier in peak period earnings seasons and lighter during valley periods.

4)     Expect to make most of your money in peak periods (opening hour and earnings season). 

5)     Maintain apathy by physically detaching yourself from the screens after the opening session.

6)     Three profit days, one break even and one drawdown day per week are perfectly acceptable.