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Day Trading

Tug of War to Tug of Weird

Last week’s market tug of war seemed to be better than expected U.S. earning versus European woes. Europe clearly won Friday as the markets spent the good part of the trading session face down in the mud, refusing to move after their loss. While a number of big names including General Electric beat earning estimates, only 45% of companies that have reported topped the revenue expectations. That's the lowest percentage since the first quarter of 2009, according to FactSet. Over the past four years on average, 56% of companies reported actual sales above the mean sales estimate at this same point in earnings season. So Europe was easily able to yank the proverbial rope across the center line as things from Spain have gotten particularly dicey. Home prices are absolutely imploding, bad loans are mushrooming, and bank deposits are dwindling. According to reports out of Europe, 100 billion euros will not be enough to shore up Spain’s banking system. And speaking of banks, Moody’s downgraded the credit rating of 13 Italian banks. According to Moody’s the two main factors for the downgrade were: “1. Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access than at the time of our rating action five months ago due to increasingly fragile market confidence, contagion risk emanating from Greece and Spain and signs of an eroding non-domestic investor base. 2. Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets which could weaken market confidence further, raising the risk of a sudden stop in market funding. “ Of course this tug of war isn’t over because we all know that the United States has the secret rope pulling weapon. When you have Ben Bernanke and his printing presses as an on-demand anchor, the markets won’t remain down for long. From the tug of war, to the tug of weird, Silver Sponge Bob Square Pants coins minted in New Zeland were among assets seized by FBI agents from the vault at Peregrine Financial Groups headquarters last week. So while there may be a lack of confidence in the broader financial markets, remember “IN SPONGEBOB WE TRUST!” Trade well and follow the trend, not the so-called “experts.” _________ Larry Levin President & Founder - TradingAdvantage  (Jul 24, 2012 | post #1)

Day Trading

See No Easing, Hear No Easing

Since day one of Ben Bernanke’s testimony did not provide any clear signs of when we could see another round of quantitative easing, Big Ben has gone into obfuscation mode and he’s playing it close to the vest. Perhaps, we might need to look at the moon for a market tip. On Tuesday Mr. Bernanke will have the second day of his testimony and the moon, yes the moon, will have a new phase. Since Ben will remain tight lipped, we might need to review previous studies on how the major indexes have performed during the changing of the moon’s phases. The market psychics aren't answering their phone Actually, the Buy the new moon and Sell the full moon strategy in past years has had some success, but so far this year the S&P futures contract is not highly correlated. Surprisingly, the inverse of this strategy has worked - buy the full moon sell the new moon has been profitable four months out of seven this year. Maybe Ben will take some cues from his lunar guides and invert his monetary strategy. Since QE’s past haven’t worked and QE’s future have already been priced into the market, maybe he should tell Congress that he is turning off the printing presses and that his policy of forced liquidity has failed miserably But expecting that type of prudent talk from "Helicopter-B en" is as likely as a square moon. Trade well and follow the trend, not the so-called “experts.” _________ Larry Levin President & Founder - TradingAdvantage  (Jul 18, 2012 | post #1)

Day Trading

Swap Meet

The Dodd-Frank Act, the financial reform measures that Congress passed in the summer of 2010, (or more aptly name The Frankly-Do-nothing Act) called for the majority of the $600 trillion derivative market, including credit default swaps, to be traded on exchanges and for transactions to go through clearing houses. None of this has happened. That’s right, zip, zero, nada. Prices of credit default swaps can still be based solely on a dealer’s say-so. And yes, these credit default swaps were a main trading instrument that led to JP Morgan's recent $2 billion trading loss. The folks on Fraud Street have no interest in changing the way things are done. Why would they want to put an end to their private profit party? Now, they are lobbying vigorously against the Commodity Futures Trading Comission's proposal that swap execution facilities provide market participants with easily accessible prices on “a centralized electronic screen.” But of course the commission’s rule would eliminate the one-to-one dealings by telephone that are so lucrative to the fraud street banksters. Gretchen Morgenson writing in the New York Times, hits the nail on the head writing about regulations in the United States “The British, at Least, Are Getting Tough http://www.nytimes .com/2012/07/08/bu siness/barclays-ca se-opens-a-window- on-wall-st-fair-ga me.html?_r=1 “It’s hard to believe, in the wake of the Libor mess, that Wall Street and its supporters in Congress would continue to battle against price transparency in any market. Then again, that’s precisely what they did after the credit crisis.....With each new financial imbroglio, the gulf widens between Main Street’s opinion of Wall Street and the industry’s view of itself. “ When it comes to the real players in the US financial markets, there is about as much regulation as at a swap meet. Trade well and follow the trend, not the so-called “experts.” __________ Larry Levin President & Founder - TradingAdvantage  (Jul 11, 2012 | post #1)

Day Trading

Rally Time

Friday’s stock indices all closed markedly higher, which came after huge higher gap opens. What happened in between the higher gap opens and the close was nothing. The markets were dead…until the closing bell. Only then was there life when the markets went even higher on a short covering explosion. ZeroHedge has a good recap of the action here http://www.zerohed ge.com/news/brian- sacks-window-dress ing-farewell-gift- wall-street Stocks opened around 2% gap higher this morning after the late-night headlines from Europe made many think that the tooth-fairy and Santa are real once again. S&P 500 e-mini futures saw some selling into the open but then stabilized amid a very narrow range for much of the rest of the day - leaking higher on low volume-driven short-covering. The news from Germany of ESM ratification was greeted with absolutely no price movement as an indication of just how insane things are but the need to drive stocks up in the last few minutes was crazy. Into the close, volume exploded as ES rose 10pts in minutes from absolutely nowhere. Average trade size was very heavy during this period and delta skewed notably to block selling into the ramp though it is never that obvious. ES closed above its 50DMA back to its highest since 5/8. The Window-Dressing Roadmap It would appear that the No 'New' QE from the FOMC on 6/20 left a lot of all-important funds long-and-very-wron g. Today's rampfest miraculously lifted (window-dressing) Energy and Financials (two of the MOST sensitive sectors to QE) back to perfectly unchanged from the exact time of the FOMC announcement. Notably, since that exact time 'safe' sectors of Staples, Healthcare, and Utilities have outperformed as Tech, Materials, and Discretionary are underperforming (though all did their very best to end the month up (especially relative to the FOMC news moment)... fascinating eh? While stocks exuded every bit of total insanity, Treasuries ended the week lower in yield across the whole complex (leaving Gold, the Long Bond, and the USD all almost perfectly +2.8% YTD). WTI is down 14.5% YTD to close Q2 thanks to a huge VW-like 9% squeeze higher today (that acounted in correlated risk terms for around half of equity's performance) up to around $85. Equity and HY credit have recoupled but HYG is the most expensive relative to its fair-value in over a month. The USD plunged on EUR strength (and AUD carry trades) to end the week -0.66% but Gold and Silver more than doubled those implied gains ending the week +1.8%. VIX tested below 17% late on but ended above it (down 2.6 vols) closing at 6/20 closing levels. The main takeaway is that most risk assets recovered to last week's highs but stocks turned the amplifier of insanity to 11 and pushed back to near two-month highs not to be outdone into quarter-end (wink wink). Trade well and follow the trend, not the so-called “experts.” _________ Larry Levin President & Founder - TradingAdvantage  (Jul 3, 2012 | post #1)

Day Trading

Trading Tips: Five Ways to Stay Focused In Scary Markets

2) Never Anticipate Your System. Let your system fully play out so that its various criteria are fulfilled before entering your trade. When in doubt keep out or if already in a trade, get out! 3) Always Use Stops; NEVER trade without them. Make it your practice to enter your stop loss trade before you enter your trade. 4) Never Let a Winning Trade Become a Losing Trade; use a trailing stop once your trade is showing a profit. Once a trade is showing a two-point profit, consider bringing in your stop to the entry price. Should the market unexpectedly reverse, it would be a scratch trade. After that, trail your stop two points for every two points prices move in your favor. 5) Trade with the Trend. Do not attempt to pick tops and bottoms to trade against the trend. Following these principles and spending the time necessary to create the psychological stability necessary to succeed is the most difficult part of this profession. Your goal should be to have the self knowledge and confidence that you unquestionably believe in your trades. Identify with Mark Douglas' dictum, "markets can't do anything to any trader who completely trusts himself to act appropriately, in his best interests, under all market conditions." Best Trades to you, _________ Larry Levin Founder & President - Trading Advantage  (Jul 1, 2012 | post #2)

Day Trading

Trading Tips: Five Ways to Stay Focused In Scary Markets

In the fallout from the 2008 global financial crisis, there have been moments that have been driven by pure fear. These are the moments when it can be hard to maintain your composure and trade your plan. Unfortunately, these big days are the times when you need that composure the most. Here is a quick lesson in why it is important to keep focused in a scary market and how to achieve that focus. Market Basics First let us understand some market basics. Markets exist to facilitate trade. From moment to moment the market offers traders the opportunity to profit from price movement. It's an environment where every trader has the freedom to create his own results, i.e. all the choices and the power to exercise those choices reside with the trader. 'Scary' implies fear, anxiety, or insecurity. In his book, The Disciplined Trader, Mark Douglas addresses these issues in a no-nonsense, no holds barred way. Let me give you an example of his views on this subject: "It was only the lack of trust I had in myself to do what was needed to be done that I was really afraid of." "The market is never wrong in what it does; it just is." "The market cannot take anything away from you that you don't allow." "In the trading environment the outcome of your decisions is immediate, and you are powerless to change anything except your mind. You have to learn to flow with the markets; you are either in harmony with them or you are not." It becomes self evident that your trading success will be dependent on your ability to correctly perceive opportunity, to execute a trade arising from that perception and your ability to allow your profits to accumulate. Are You Consumed by Fear? Markets are inherently scary. If you are a trader consumed by fear, then the market will always be scary, and the only variable is how scary it is at any given time. When consumed by fear a trader is doomed to failure. Fear will twist your perceptions and blind you to the opportunities available. Fear will almost always drive us to make the wrong action, and it will without question make us totally incapable of accumulating profits that might be made. Even for disciplined and proven successful traders, the markets can be scary. Objectively scary markets can be quantified by the Volatility index, the VIX - the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge." Levels below twenty are associated with market complacency and over thirty with increasing market anxiety. Extremes are often excellent contrarian indicators. Trading should be considered a business, and your rules should reflect good business practices. These would include adequate capitalization. Conservation of capital is your primary job. If you are under-capitalized, you are half way to the losers stall before you even start. Over-Trading & You Do not over-trade. This too will drain your energy, your attention to detail, your perception of price changes and the efficiency of your trade execution. Over-trading will inevitably drain your capital from your account to the guy on the other side of your trades, who you can be sure does not have his/her perceptions blunted. If you have this as your guiding star, chances are you will eventually succeed in this business. Preserving capital is closely associated with risk management, and I will address this in the five things you can do when there is evidence of market anxiety. 5 Rules to Trade By 1) Stick to a Trading System that has proved itself over time to be profitable despite losing trades. No system is 100% correct. It only needs to be correct 50% of the time if profits are substantially greater than losses.  (Jul 1, 2012 | post #1)

Day Trading

Soccernomics

Soccer fans are only two games away from the Euro 2012 finals. Portugal and Spain play today while Italy will face the Germans on Thursday. The winner’s will play to claim the title of the “Best in Europe.” It’s hard not to draw ironic parallels, as Thursday also marks the beginning of the EU summit to settle the economic score. The lay-up analogy was earlier in the week, when the “best” beat the “worst” as Germany topped Greece 4-2 to advance to the semi-finals. If financial health translates to future soccer success, Germany should trounce Italy while Portugal and Spain will play an uninspired, poorly executed match that ends in a 0-0 tie. While the US doesn’t compete in the Euro Soccer (truth be told, we’d get our butts kicked), we are the big player in the European financial game. In fact, the man of the match should be Ben Bernanke. That’s right, because even though the US isn’t in this game, Ben Bernanke is the uber defender, stopper and goalie for all of Europe’s woes. Not only is the U.S. single largest source of money to the International Monetary Fund, we are the lender of last resort with continued dollar injections to the Eurozone. Trade well and follow the trend, not the so-called “experts.” _________ Larry Levin President & Founder - TradingAdvantage http://www.trading advantage.com  (Jun 28, 2012 | post #1)

Day Trading

Trading Tip #30: Advanced Technical Indicators - Bollinge...

Let's take another look at a more advanced technical tool - Bollinger Bands. These were developed by John Bollinger in the 1980s. In simple terms, they use a simple moving average and standard deviations to give a different perspective on potential highs and lows. Bollinger Bands have a middle band and two outer bands. The middle band shown on this indicator is a moving average, usually a simple moving average (see Tip #29 for more on those) although some traders do use the exponential moving averages. The standard deviation formulas for the outside bands might be calculated like this example: * Middle Band = 20-day simple moving average (SMA) * Upper Band = 20-day SMA + (20-day standard deviation of price x 2) * Lower Band = 20-day SMA - (20-day standard deviation of price x 2) The actual values used may depend on user preference. Use and interpretation may also vary. This technical tool is a way some traders try to define and observe potential patterns. I don't claim to be an expert on these, but there are some common basics that analysts agree on. Volatility is the name of the game for the upper and lower band. Since they are based on standard deviations from the middle band they move closer to the middle when volatility contracts, and further out when volatility expands. Based on this level of volatility, the relationship between those lines and prices can be used to signal potential market conditions. Some analysts might see an overbought market where prices touch the upper band. Conversely, an oversold market might exist when prices are edging towards the lower band. http://tradingadva ntage.com/lp/tradi ngtips/TAtradingTi p30/Images/ChartMa il30.jpg Past performance is not necessarily indicative of future results. courtesy of Barchart.com Other subtle patterns can be seen with Bollinger Bands on a chart. The way the prices interact with the bands can lead to different kinds of patterns that technical analysts might interpret for trade designs. They have names like W-bottom or M-top or walking the bands. If you like playing with these statistical measures, you might enjoy reading more about them. Generally speaking, the visual cues regarding volatility are the main feature for this kind of chart overlay. They can also be used in conjunction with other analysis or observations as a way of complementing other signals or patterns. Play with Bollinger Bands and see how they might work with your trading tools to confirm or sharpen your market observations. Best Trades to you, Larry Levin Founder & President - Trading Advantage http://www.trading advantage.com  (Jun 10, 2012 | post #1)

Day Trading

Secret Trading Tip: What is day trading?

Day trading is probably one of the most misunderstood labels in the industry. Some people might picture a random trader acting like a cowboy just buying and selling with pure abandon. Others might imagine a seasoned vet pouring over charts and analysis, looking for a chance to try to scoop up a few points here or there. Let’s set the record straight on what day trading does – and doesn’t – entail. Day trading is definitely not for the faint of heart. Day trading is possible because of the great amount of leverage there is in the markets. The ability to buy or sell contracts that represent exponentially greater values than what is held in deposit in a trading account can mean the chance for big gains or even bigger losses. That is why a lot of day trading is thought of as gambling or a Wild West show. There are a lot of traders out there who exclusively day-trade. The mechanics to day trading are straightforward. You are in a trade and out of it in the same trading session. There is no “holding” the position overnight or through to the next session, looking for more potential profits. That is position trading. Why open a trading position and close it in the same session? There are a bunch of reasons that someone might cite, but the most obvious is that there is a different kind of exposure between trading sessions. For a day trader, there is an inherent risk that the market may gap up or down and against an open position when trading begins in a new session. Picture some of the overnight or over the weekend financial bombshells that could be dropped. A couple of good examples are those nights when Asian markets have tumbled on their fundamentals and North American markets open much, much lower the next day. This would be a gap to the downside that would be a big negative to an open long position. Closing things out before the session ends is a way that some traders try to avoid that kind of exposure. So how do day trades work? Most markets are a constant flux between buy orders and sell orders, and it is unlikely that a highly liquid market (one that has many buyers and sellers, making it relatively fluid to open and close positions) would stay at a constant price through a whole session. Day traders look to buy low, sell high and scoop up a few points to their benefit. Trades can be based on: - Identifying and trying to follow a trend - Looking for technical signals that suggest a coming reversal and try to play a breakout - Playing market movement off identified support or resistance - Quick in-and-out trading strategies like scalping, where the trader tries to identify arbitrage opportunities where there is a price imbalance - Any personal system a trader might use to try to identify trade opportunities The last one on this list is becoming more common as trading moves into the electronic world. Programs on computers look for specific algorithms and other identifiers that may signal price action that a day trader can use to try to gain an advantage. The one thing that people need to remember is that this style of trading can also quickly accumulate fees and commissions for each round-turn on a trade. Since you are not approaching the market with a single buy-and-hold approach, you have to factor these extra costs into the 2-3 points you are trying to gain on every trade. Make sure that there is enough room to make the risk-to-reward ratio worthwhile. Day trading is fast, and risky, and not for everyone. The quick pull-the-trigger style trading that is synonymous with day trading is not for everyone. There are great disadvantages and heavy risks. I think the big trick is to find and stick to a trading plan. Having a pre-determined approach to the market – a place to get in and a place to get out for profit OR for loss – should help you keep your head on straight. Trading with a plan instead of raw emotions is what separates the cocky cowboy image most people might have from the actual serious day trading reality.  (Jun 3, 2012 | post #1)

Day Trading

Good News and Bad News

One of the biggest moments for the markets can come when there is a key news release or fresh fundamental data. Buyers and sellers seem to wrestle with the potential outcome, and in the case of larger announcements, volatility goes through the roof. The problem that I see some traders struggle with is knowing what news to look for, and how to trade it. Finding news that you can actually use. The thing that often comes up when you talk about announcements is that a lot of traders don’t understand the market reactions. A report will come out and it will appear as though it is good news, but the market will go down. The thing is that some people still try to trade on the news itself, when in reality they should be looking at what the market thinks the news will be. More than likely, those days when there was a “good” piece of data but the market went down, forecasts were calling for a better number. The other explanation is that the report just might not have been as important to the market as it was to the observer trying to trade it. Reports and news events are lobbed into a general basket of analysis called fundamentals. Fundamental analysis focuses on the things that have the potential to impact the supply or the demand in a particular market, thus affecting the prices. Reports that come out with some regularity, like initial unemployment claims, are unlikely to rock the S&P unless they are really, really shocking. Federal Reserve meetings, which are a rarer occurrence, tend to hold a bit more zest for traders. Monthly employment readings are also big. Producer Price Index (PPI) and Consumer Price Index (CPI) readings are key figures for inflation, which in times of economic troubles might get more attention than a decade or so ago. Perhaps one of the best ways to weigh what kind of news is valuable to traders is to keep your eye on the stories daily. Traders shouldn’t keep their head in the sand. If you know what is happening in the market that week, that day, and that hour, it is better all around. You can line up the market’s movements with fundamental events. Of course, there will be big news that comes out of nowhere that can still catch you and the market off guard. However, there are plenty of economic report calendars, Federal Reserve meeting notices, and other lists that show you key data points. Most news outlets will also report results of a general survey of economists showing what the basic expectations might be. Knowing what the expectations are ahead of the report is just as important as the report itself. Good news can quickly become bad news if it falls short of what people were looking for. A great example of this in recent news is the build-up ahead of the debt ceiling deal. In any other situation, finding a compromise or agreement would be considered a good thing and good news. The opposite was true in this case as investors and traders weighed the potential impact of continuing debt and a tarnish on the credit rating for the US. http://tradingadva ntage.com/lp/tradi ngtips/TATradingTi p17/email17_s& p500mini.png Past Performance is not necessarily indicative of future results. Chart courtesy of Gecko Software One of the best favors a trader can do for themselves is stay appraised of the bigger picture. There are plenty of places where you can get calendars online, and check for the stories that might impact the market. The longer you watch these fundamentals, the more likely you are to be able to distinguish which ones might bring higher volatility and potential trading opportunities. Avoid developing tunnel vision and focusing only on the things you think could be important. Watch for forecasts and estimates on reports – these are just as important as the actual news release and can be key in trying to gauge possible market direction. Good news and bad news are relative to expectations. Best Trades to you, __________ Larry Levin Founder & President - Trading Advantage http://www.trading advantage.com  (May 27, 2012 | post #1)

Day Trading

Still too Big to Fail

While the sobering news from Europe has finally started to weigh on US stocks, I thought I’d add gasoline to the fire and remind everyone of the twisted morass that’s our own domestic financial situation. The top 5 banks in the US now account for a massively disproportionate amount of the derivative risk in the financial system. Specifically, of the $250 trillion in gross notional amount of derivative contracts outstanding (consisting of Interest Rate, FX, Equity Contracts, Commodity and CDS) among the Top 25 commercial banks (a number that swells to $333 trillion when looking at the Top 25 Bank Holding Companies), a mere 5 account for 95.9% of all derivative exposure. The top 4 banks: JPM with $78.1 trillion in exposure, Citi with $56 trillion, Bank of America with $53 trillion and Goldman with $48 trillion, account for 94.4% of total exposure. As historically has been the case, the bulk of consolidated exposure is in Interest Rate swaps ($204.6 trillion), followed by FX ($26.5TR), CDS ($15.2 trillion), and Equity and Commodity with $1.6 and $1.4 trillion, respectively. And that's your definition of Too Big To Fail right there: the biggest banks are not only getting bigger, but their risk exposure is now at a new all-time-high. Good thing Backstop Ben and Congress are always ready with their catcher’s mitt. Trade well and follow the trend, not the so-called “experts.” Behold the age of infinite moral hazard! On April 2nd, 2009 CONgress forced FASB to suspend rule 157 in favor of deceitful accounting for the TBTF banking mafia. _______________ Larry Levin President & Founder - TradingAdvantage http://www.trading advantage.com  (May 9, 2012 | post #1)

Day Trading

Trading Tip #16: Buyers or Sellers

A question I often receive is, "How can there be more buyers or sellers at one price? Isn't there a buyer for every seller and a seller for every buyer?" The answer is yes, but people are forgetting one important thing. There is a bid and an ask (or offer), and only one of them can be traded at a time. A bid is an expression of willingness to buy at a price; an ask (or offer) is an expression to sell. If the ES is trading at 1200.50, the bid is either 1200.25 or 1200.50. The answer depends on which way the market has just traded. Let's make it easy and simply say the ES is between 1200.25 & 1200.50, making the bid 1200.25. In order for the market to move from 1200.25 to 1200.50, someone must pay up to get filled. You may not be in a hurry and attempt to wait to buy 1200.25, but that will usually only happen when the bid/ask drops to 1200.00 & 1200.25 and you are actually filled on the ask. If you are trying to buy and really want to get filled, you must pay up at the offer or risk missing the trade. Conversely, if you really want to get filled on a sale, you must hit the bid, or reach down to get filled. Sure, there is someone on the other side of the trade, but without you choosing to reach up and pay the offer the market stands still. Therefore when trades are executed at the offer it is said to be done by the buyers even though there are sellers at that price taking the other side. Every buy will be filled on the offer and every sell will be filled on the bid, period. Let's say we once more have a number of 1200.50 and we see that over time (sometimes just a few seconds) the fills were 100 x 1300. We can say that there were 1200 more buyers than sellers at 1200.50 because of how traders reacted to the bid/ask spread when it was at 1200.25 x 1200.50 and higher at 1200.50 x 1200.75 (called the spread.) When the market was at the lower spread, 1300 buyers reached UP to pay the 1200.50 offer. When the market was at the higher spread, 100 sellers reach DOWN to sell the 1200.50 bid. When the spread traded around this price range there truly were more buyers than sellers at 1200.50. Understanding bid and ask can open up other realms of technical analysis. There are some traders who will look at the bid and ask order flows to try to get clues to potential movement in the market based on what buyers and sellers are doing. This is often referred to as reading order book flow or depth-of-market. If you look at the number of orders for each bid and ask around the current market price you can see the probable number of transactions available at those levels. Reading this information is the key to certain kinds of volume based trading systems and other trading methods that follow the book order flow. Best Trades to You, Larry Levin Founder & President - Trading Advantage http://www.trading advantage.com  (May 1, 2012 | post #1)

Day Trading

Trading Tip #20: Understanding Candlestick Patterns – Harami

I've already covered some of the better known patterns like doji (Tip #18) and engulfing (Tip#19) – now it's time to add harami to your candlestick chart pattern arsenal. Let's take a look at what this technical signal looks like, and what opportunities might be presenting themselves when you see it. Harami patterns can be bearish or bullish Harami, like engulfing patterns, are a two candlestick formation. They are actually often confused with engulfing patterns because they both involve candles where one real body is bigger than the other. The difference is that in harami, the preceding (or first) candle in the pattern is the longer one of the pair; it encompasses the whole body of the second candlestick. If you see this two candlestick pattern, it could be a sign of a reversal In a candlestick chart, bullish harami are formed when a long filled (or red) candlestick appears during an established downtrend and is followed by a smaller hollow (or green) candlestick. The reason this is a bullish signal is based on the idea that the first candle forms during a session with potentially high volume and bearish sentiment. The following day, there is a gap higher to open, a smaller trading range, and prices were supported above the previous day's close. This is seen as a potential indication that things are about to turn – a bullish reversal. See illustration at : http://tradingadva ntage.com/lp/tradi ngtips/images/emai l20_chart-right.pn g A bearish harami is made up of a long hollow (or green) candlestick occurring during an established uptrend which is then followed by a smaller filled (or red) candlestick. Similar principles apply to this signal as they did to the bullish version – the first day makes way for a smaller range led by a gap lower and selling pressure that kept prices from rising. See illustration at : http://tradingadva ntage.com/lp/tradi ngtips/images/emai l20_chart-left.png It is worth noting that some candlestick chartists suggest harami can include candlesticks of any color combination – filled + filled, filled + hollow, and hollow + hollow. The whole point for them is for a larger candlestick to be flanked by a smaller one. The reversal signal is just potentially stronger when the second candle is a different color. The two different candle sizes are just seen as an abrupt and sustained bit of trading contrary to the prevailing trend. Harami are telling you that there has been a sudden trading shift This candlestick pattern tends to crop up when there has been an apparent loss of trading momentum. The kanji definition of harami is embryo – I take this to mean that the second candlestick is just the early start of a new trading direction, contrary to the existing one. Like most candlestick patterns, it may be wise to look for confirmation of a reversal once you spot harami. Best Trades to you, Larry Levin Founder & President- Trading Advantage http://www.trading advantage.com  (Apr 8, 2012 | post #1)