When trading in financial markets, analyzing price movements and predicting future trends is of vital importance. Whether trading in the stock market or the foreign exchange market, we commonly use Japanese candlestick patterns for financial analysis. Candlesticks offer us numerous signals. Among these signals, the "Harami" pattern that comes with Japanese candlesticks acts like a market detective, signaling changes in trends. In this article, we'll focus on defining the Harami pattern, its types, interpretation, and present live trading examples illustrating the use of this useful indicator in financial markets.
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| Bullish and Bearish Harami Candlestick Patterns |
Topic: Harami
Type: two-way
Trend direction: reversal
What is the Harami
candlestick pattern?
The Harami candlestick pattern is a reversal formation that
occurs in Japanese candlestick charts. Harami is a Japanese term that means
"pregnant." This pattern is formed by a small candle contained within
a larger candle. The Harami pattern is divided into two main types:
- Bullish Harami
- Bearish Harami
The Harami pattern appears as a smaller candle contained
within a larger candle. This two-candlestick pattern often indicates that the
momentum in the market is slowing down or could be a signal of a trend
reversal.
Note: Novice traders in the financial markets sometimes
confuse the Harami candlestick pattern with the Engulfing candlestick pattern.
However, there are noticeable differences between these two candlestick
patterns. In the Harami pattern, the first candlestick is larger, while the
second one is smaller, whereas in the Engulfing pattern, it's the opposite.
1. Bullish Harami Candlestick Pattern
Definition: The Bullish Harami is a type of pattern
in Japanese candlestick analysis that indicates a change in trend. It occurs at
the end of a downtrend and generally signals the beginning of an upward
movement. The Bullish Harami pattern consists of two candlesticks:
- The First candle: It is usually a long bearish candle, representing the current downtrend. It appears as a red or black candlestick.
- The Second candle: It's a smaller bullish candlestick that fits inside the first candle. This candle normally has a shorter body and opens and closes within the body of the preceding bearish candle. It appears as a green (white) candlestick, sometimes also seen in red (black).
The Bullish Harami pattern is a reversal pattern that
indicates that the previous downtrend is slowing down and a bullish trend may
be beginning. This pattern suggests that selling pressure in the market is
decreasing and buyers are starting to push the price up.
Interpretation: The Bullish Harami can be interpreted
as a sign of a reversal in a downtrend. This pattern indicates that the trend
is losing strength and there's a higher probability of a reversal. If this
pattern emerges at a support level or an oversold zone, it might be more
reliable. The Bullish Harami pattern may suggest that the current downward
trend is slowing down and buyers are starting to enter the market.
Trading with the Bullish Harami
When a Bullish Harami candlestick pattern appears on a price
chart, it may be tempting to enter a long position immediately. However, it is
important to not rush into a trade and to confirm the signal with other
technical analysis tools. We can also consider the strength of the current
trend and the market conditions before entering a trade. Every trading strategy
can vary depending on personal preferences and market conditions. Take a look
at the following trading example on the 4-hour chart of the USD/CNY currency
pair:
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| Bullish Harami on USD/CNH chart. |
Entry: The Bullish Harami pattern can provide a good
entry point near the price level where the pattern forms. However, it may be
more prudent to wait for confirmation after the candle where the pattern forms,
rather than immediately buying when the pattern forms. For example, entry can
be made by waiting for the next candle to close higher after the pattern forms.
Stop Loss: A stop-loss level is important to limit
risk against a possible false signal. Typically, a stop-loss level can be set
below the bullish Harami pattern or below the candle used in the pattern
formation. This is necessary to preserve the validity of the pattern and
minimize losses in sudden reversals.
Target: Target levels can vary depending on your
trading strategy and risk appetite. We can estimate an uptrend from the point
where the bullish Harami pattern appears. Technical analysis tools such as
previous resistance levels, Fibonacci retracement levels, or trend lines can be
used to determine target levels.
Keep in mind that the Forex market, which promises high
returns, also has a risky side. We should be careful when trading in financial
markets. The bullish Harami pattern can be a notable signal, but it can also
give false signals like any other candlestick pattern. For this reason, it
should not be used alone. Using this pattern in combination with other analysis
tools can help us make more accurate trading decisions.
2. Bearish Harami Candlestick Pattern
Definition: The Bearish Harami is a reversal
formation used in Japanese candlestick analysis. This pattern can signify the
end of an uptrend and the beginning of a downtrend. When this pattern appears
in the market, it's considered possible that the ongoing uptrend might weaken
or a downtrend might commence. The Bearish Harami pattern consists of two
candlesticks:
- First candle: Typically a long bullish candle representing the ongoing uptrend, seen as a long-bodied green or white candlestick on the price chart.
- Second candle: This is a smaller bearish candle that is contained within the first candle. This candle typically has a shorter body and opens and closes within the previous bullish candle. This candle appears as a red (black) candle with a short body, rarely as a green (white) candle.
The Bearish Harami pattern indicates that the momentum of
the uptrend is slowing down and a possible beginning of a downtrend. It
suggests that the first candle has lost its strength and buyers have weakened,
thus sellers are starting to take control.
Interpretation: The Bearish Harami is typically
interpreted as a sign of notable weakness or reversal in the current uptrend.
In a chart where a bearish Harami forms, the first candle will have a long
body, indicating that the uptrend is continuing. This reflects that buyers are
continuing to drive prices higher. The second candle will have a shorter body.
This shows that buyers are unwilling to continue driving prices higher. The
bearish Harami can be interpreted as sellers beginning to gain strength,
signaling the end of the uptrend and the beginning of a downtrend.
Trading with the Bearish Harami
When the bearish Harami pattern appears in the current trend
in the market, we can consider opening a Short position. But first, we need to
take into account the strength of the trend. This pattern provides a safer
signal if it is seen in an overbought zone or near a resistance level. We can
consider placing a Sell order only after we have definitely confirmed with
other analysis tools. Let's take a look at a live trading example on the daily
chart of the BRENT OIL commodity CFD below:
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| Bearish Harami on BRENT OIL Commodity CFD chart. |
Entry: We see the bearish Harami pattern as a sign of
weakness in the current uptrend. When this pattern forms, it is often safer to
wait for the close of a confirmation candle that validates the pattern
formation. The confirmation candle can be a bearish candle that shows a
downtrend after the pattern formation is complete. The entry level is a level
below the body of the second candle. This level indicates a reluctance of
buyers to continue pushing prices higher.
Stop Loss: The stop-loss level helps limit your
losses if the trade goes against you. When the Bearish Harami pattern forms,
the stop-loss level is often placed above the pattern formation or above the
candlestick used. This is crucial to maintain the pattern's accuracy and reduce
the risk of sudden reversals.
Target: When setting target levels to estimate the
expected decline after a bearish Harami pattern, we can act according to our
own strategy. Technical analysis tools such as previous support levels,
risk/reward ratio, Fibonacci retracement levels, or trend lines can be used to
determine target levels.
Please keep in mind that volatility can be high and prices can move suddenly when trading in the Forex market. In this case, the bearish Harami pattern, like any candlestick pattern, can be misleading. Therefore, it is recommended to use this pattern in conjunction with other technical analysis tools and indicators to improve its accuracy.