HARAMI BULLISH vs. BEARISH

Both Harami Bullish & Bearish are reversal patterns.
Whether the pattern is bearish or bullish reversal, it depends upon whether it appears at the end of a downtrend (Harami Bullish Pattern) or an uptrend (Harami Bearish Pattern).

Basically, these patterns consist of 2 candles:
The first day is characterized by a long body candle, followed by a candle whose body is completely contained within the range of the previous day's body.

These patterns imply that the momentum of preceding trend may have ceased or slowed down significantly, signaling a possibility of reversal.

Note:
Don�t confuse this pattern with the Engulfing Pattern. The candles in these patterns are actually just the opposite of the Engulfing Pattern.

HARAMI BULLISH PATTERN

Harami Bullish is a bottom reversal pattern / bullish reversal pattern.
It can be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

When the price is a declining trend for some time, a two-candle pattern forms.
The body of the 1st candle is the same color as the current trend (should be a long black/red candle).
The body of the 2nd candle is white, which opens and closes within the body of previous day's candle.

What does this pattern imply?
When the price is in the midst of a strong declining mode, the buyers (bulls) suddenly step in and open the price higher than the previous day's close.
This shocks the sellers (bears), and they start covering their short positions quickly, causing the price to rise further. However, the short-covering rally can sometimes be tempered by the late comers who see this as an opportunity to short the trend they missed the first time, and as a result, a small candle that is still within the previous day�s body could be formed.
A confirmation of the reversal on the next day in terms of a higher close (preferably with high volume) would be needed to ascertain that the trend may be in a reversal.

HARAMI BEARISH PATTERN

Harami Bearish is a top reversal pattern / bearish reversal pattern.
It could be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

When the price has been in a rally mode for some time, a two-candle pattern forms.
The body of the 1st candle is the same color as the current trend (should be a long white candle).
The body of the 2nd candle is black/red, which opens and closes within the body of previous day's candle.

What does this pattern imply?
During an increasing price trend, after a long white candle day, the next day, the sellers (bears) suddenly step in and open the price lower than the previous day's close.
Shocked by the sudden appearance of sellers (bears) that causes some deterioration on the existing increasing trend, the buyers (bulls) become cautious and begin taking their profits by selling their long position, causing the price to drop further. However, on the other hand, some late buyers might see this as an opportunity to buy the trend missed previously. As a result, the price may stay in a small range throughout the day, forming a small candle but it�s still within the previous day's body.
A lower close on the next day would be needed to prove that the trend may be in a reversal.

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

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Good Reading Links

Corey from Afraid To Trade: How Do We Play Overextended Conditions?

Dr. Brett Steenbarger from Traderfeed: Ten Generalizations That Guide My Trading

Stockbee: How To Trade Earnings?

Chris Perruna: A Technique For Profit Taking

Casey Murphy in Investopedia: Trade Broken Trendlines Without Going Broke

Dr. Bruce Hong in Trader Psychology: Assessing Trader�s Strength Part 1, Part 2, and Part 3.

Adam from Daily Options Report: Showed some interesting volatility behavior in his post �Speaking of Volatility�.

Have a nice & meaningful weekend ahead! :)

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Major Candlestick Chart Patterns: BULLISH vs. BEARISH ENGULFING

Both Bullish & Bearish Engulfing are reversal patterns.
Whether a pattern is bearish or bullish reversal, it depends upon whether it appears at the end of a downtrend (Bullish Engulfing Pattern) or an uptrend (Bearish Engulfing Pattern).

Basically, these patterns consist of 2 candles:
The first day is characterized by a small body candle, followed by a candle whose body completely engulfs the previous day's body.
Shadows are not a consideration.




BULLISH ENGULFING PATTERN
Bullish Engulfing is a bottom reversal pattern / bullish reversal pattern.
It could be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

Price has been declining for some time. Then a small black/red body occurs with low volume (1st day).
The next day (2nd day), the stock opens at new lows (below the close of the previous day�s candle) and then rises. The rise is accomplished by high volume, and finally closes above the open of the previous day, forming a long white candlestick.
In other words, the 2nd candle�s body (white candle) completely engulfs the 1st candle�s body (black/red candle).
This indicates buying pressure has overwhelmed the selling pressure, suggesting a potential reversal of trend.
If the following day the price is able to close higher, it provides confirmation to this bullish reversal pattern.

BEARISH ENGULFING PATTERN
Bearish Engulfing is a top reversal pattern / bearish reversal pattern.
It could be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

Price has been in a rally for some time. Then, a small white body occurs with low volume (1st day).
The next day (2nd day), the stock opens at new highs (above the close of the previous day�s candle) and then falls. The fall is accomplished by strong volume and finally closes below the open of the previous day, forming a long black/red candlestick.
In other words, the 2nd candle�s body (black/red candle) completely engulfs the 1st candle�s body (white candle).
This indicates sellers (bears) have overwhelmed the buyers (bulls), suggesting a potential reversal of trend.
If the following day the price is able to close lower, it provides confirmation to this bearish reversal pattern.

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

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Learning / Understanding Candlestick Charts

Previously, we�ve covered some basics on candlestick charts reading & candlestick formations. In the next posts, we�ll continue to discuss some major candlestick chart patterns.
Before that, as usual, to be more organized, I�d like to put the links of all posts on this topic below, and place the link to this post on the top left corner for easier future reference.

Click the following links to read each of the posts:

1) How To Read Candlestick Chart � The Basic

2) Understanding Candlestick Formation:

a) Part 1: Long & Short Candles
b) Part 2: Long Shadows, Hammer / Inverted Hammer, Spinning Tops
c) Part 3: Doji, Long-legged Doji
d) Part 4: Dragonfly Doji, Gravestone Doji

3) Major Candlestick Patterns:

a) Bullish vs. Bearish Engulfing

b) Harami Bullish vs. Bearish
c) Harami Cross Bullish vs. Bearish

d) Piercing Line vs. Dark Cloud Cover

e) Hammer vs. Hanging Man
f) Inverted Hammer vs. Shooting Star

g) Morning Star vs. Evening Star
h) Morning Doji Star vs. Evening Doji Star
i) Abandoned Baby Bulish vs. Bearish

j) Tweezer Bottom vs. Tweezer Top

4) Summary:

a) Major BULLISH Candlestick Patterns
b) Major BEARISH Candlestick Patterns

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* Options Trading Basic � Part 1
* Options Trading Basic � Part 2
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* Understanding Option�s Time Value
* Option Greeks

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How To Determine If An Option Is Cheap (Underpriced) Or Expensive (Overpriced) � Part 2

Go back to Part 1.

How To Determine If IV is High or Low? (Cont�d)

Example:



Picture courtesy of: ivolatility.com

For AAPL, the IV figures (gold colored line) range between 24% to 54%.
The peaks / highs of the IV charts are around 45% - 55%. When the IV is relatively high for the stock, that means the option�s price is relatively expensive.
On the other hand, the bottoms / lows of the IV charts are about 25% - 30%. When the IV is relatively low for the stock, that means the option�s price is relatively cheap.
The area between 35% - 40% seems like the average area. Hence, when IV is around this area, the option�s price can be considered quite �reasonable�, not �expensive� or �cheap�.
Notice that when the IV is at the peak or at the bottom, it tends to move back towards its average area.

Implied Volatility (IV) & Options Strategy Consideration
When IV is relatively low (option is cheap) and is expected to rise, buy options (i.e. consider options strategies to take advantage of the expected move that allow us to be an option buyer).
For example:
You expect the price to go up in the near term. Currently, the IV is also relatively low and it�s expected to increase, as it is approaching earnings announcement in a few weeks ahead. When you buy Call options, the option�s price could increase not only due to the rising stock price, but also as a result of the rising IV. Even when the price stays flat, the option�s price might still increase due to the increase in IV.
Buying Straddle or Strangle also can benefit from the rising IV.

When IV is relatively high (option is expensive) and is expected to drop, sell options (i.e. consider options strategies to take advantage of the expected move that allow us to be an option seller).
For example:
When you�re bullish, you may want to consider a Bull Put Spread, which allow you to sell options (and collect premiums) with a limited risk.
On the other hand, when you�re bearish, you can consider a Bear Call Spread.

To understand more about other aspects of Implied Volatility, go to: Understanding Implied Volatility (IV).

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How To Determine If An Option Is Cheap (Underpriced) Or Expensive (Overpriced) � Part 1

As discussed before in the previous post, in options trading, Implied Volatility (IV) has a huge impact on an option�s price.
An option�s price can move up or down due to changes in IV, even though there is no change in the stock price.
Some times, for instance, we also find a stock price has gone up, however the Call option of the stock did not increase, but it decreased instead. This kind of case is not surprising if we understand the factors that affect an option�s price. The reason why this phenomenon happens is usually due to a drop in IV.

Therefore, before we buy or sell an option, it is important to check if an option is relatively cheap (underpriced) or expensive (overpriced).
An option is deemed cheap or expensive not based on the absolute dollar value of the option, but instead based on its IV.
When the IV is relatively high, that means the option is expensive.
On the other hand, when the IV is relatively low, the option is considered cheap.

How To Determine If IV is High or Low?
Often, we come across some articles which suggested the way to evaluate if an option is cheap (underpriced) or expensive (overpriced) is by comparing IV against HV at a particular point of time.
When IV is considerably higher than HV, it means an option is expensive. On the contrary, when IV is much lower than HV, an option is considered cheap.

However, the problem is that IV is hardly related to HV, because IV is a prediction of stock�s future fluctuation for the next 30 trading days, while HV is a measure of stock�s fluctuation over the past 30 trading days. IV usually takes into account news or the coming important events. When an important event is expected to happen in the next 30 days (e.g. earnings announcement, FDA approvals, etc.), Implied Volatility will be relatively high. However, this may not be reflected in the �what has happened� during the past 30 days. Therefore, actually we can�t really compare IV vs. HV figures at a particular point of time.

To determine if an option is cheap (underpriced) or expensive (overpriced), IV figure at a particular point of time should be compared against its past IV trend.
Typically, IV (and HV as well) will oscillate from a period of relatively low volatility to a period of relatively high volatility. When IV is relatively high or low, normally it will tend to move back towards its average value. This pattern can be used to assess the reasonableness of an option�s price.

We�ll discuss an example and how to advantage of IV movement in Part 2.

To understand more about Implied Volatility, go to: Understanding Implied Volatility (IV).

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