I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Thursday, January 17, 2008

BEARISH PENNANT PATTERN – Part 2: Important Characteristics

Go back to Part 1: Bearish Pennant Formation.

Important Characteristics of Bearish Pennant Pattern:

Shape of Bearish Pennant:
1) Flagpole:
For Bearish Pennant pattern to be more reliable, there should be a very sharp / steep price decrease (almost vertical, and may contain gaps) on heavy volume that makes the “Flagpole” part of the pattern.
Without a steep price decrease, the pattern might be less reliable and riskier.
2) Pennant:
A Pennant part of the pattern is formed when the price movement is contained within two converging lines, representing a brief consolidation after the sharp decline.
This consolidation forms a small symmetric triangle (pennant).
The slope of the Pennant is usually neutral.

Volume:
Volume should be heavy during the formation of the Flagpole part, then decreasing during the formation of the Pennant part, and the volume should spike when the price break down through the support of the ascending lower line of the Pennant.
High volume during the breakout increases the chances of continuation of the preceding trend.
Without a volume spike on the breakout, the pattern might be less reliable.

During the formation of the Pennant, if the volume remains constant or was even increasing, then the reliability of this pattern would be doubtful and might signal a trend reversal instead.

Duration:
The duration of the pattern depends on the price fluctuation during consolidation.
The greater the fluctuation, the longer a pattern will take to form.

On a daily chart, this pattern might take about 1 to 12 weeks to develop.
Ideally, this pattern should form between 1 and 4 weeks.

When the duration is between 4 and 12 weeks, the pattern might carry more risk. After 4 weeks, interest in the stock might have decreased and make it unlikely to continue in a strong downtrend.

When the duration is more than 12 weeks, it would be classified as a Symmetric Triangle pattern.

Breakout Direction:
For Bearish Pennant pattern, the breakout should happen to the downside (i.e. breakout through the ascending lower line).
However, in some rare cases, the price might break against the previous trend, and create a reverse of trend. This reversal pattern may be signaled during the Pennant formation by a significant increase in volume, instead of decreasing.

Potential Price Target:
1) Compute the height of the Flagpole.
The height of the Flagpole is the distance from the start (highest point) of the sharp price decrease to the end (lowest point) of the decrease. (See picture in Part 1).
2) Calculate the potential price target:
Subtract the result from the top the Pennant to get the Potential Price Target.

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to breakout level for an immediate test of this resistance level. (Remember, the previous support level has now become resistance level).
However, if the price closes above this resistance level, the pattern could be considered invalid.

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

Related Posts:
* A Chance to Learn from World Class Trading Experts For FREE You Should Not Miss
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

2 comments:

Anonymous said...

Hi
I have been trying to learn option trading for quite some time . I dont have the money to go for some paid courses and intend to do it on my own through reading books and various blogs like yours. Could you suggest me some books or blogs which you might have found to be helpful . Option trading looks to be very vast and intimidaing and no matter how much I read I still not confident enough to go ahead and trade .
Thanks
Dian

OPTIONS TRADING BEGINNER said...

Hi Dian,

My apologies for not being able to response to your questions promply. I am quite busy with other things lately, and hence no chance to check the blog.

I can understand how you feel. Option trading is indeed very complicated.
So, my suggestion is don’t rush to jump into real trading so soon. I suggest you should paper trade for quite some time until you really find and are very comfortable with your own trading style, strategies and money management.
Before you’re confident enough to start real trading, don’t ever start it. Even after you’re confident enough after the paper trading, you should trade with small money when you first start real trading, just to involve your emotion in the trading.
One more thing to remember, trading psychology is the most important aspect in the success of trading.
Pls see my previous posts where I share more about paper trading:

* Should You Do Virtual / Paper Trading?
* 5 Tips For A More Effective Virtual / Paper Trading

Regarding books, I used to place the recommended books on my left bar, but I took it away. Since you asked, I put it back. Those books are some good options / trading books. Frankly, I haven’t read all of them, but I have read some of them already.
Come Into My Trading Room by Alexander Elder, Way of Turtle by Curtis Faith, and Options The Easy Way by Guy Cohen, are some of my favorites.

As for blogs, you can refer to my blogroll in the right bar. There are lots of good blogs where you can learn one thing or the other aspects of trading.

Good Luck & Regards,

Options Trading Beginner