Harami Candlestick Patterns: A Trader’s Guide

In this article, we will discuss

Candlestick patterns are one of the most valuable tools for a trader. These patterns provide crucial insights into market sentiment and an asset’s future price movements. Understanding the nuances of these candlestick patterns may potentially increase the chances of success.

In this article, we are going to look at one of the most powerful multiple candlestick patterns in technical analysis - the Harami candlestick pattern. The appearance of this pattern is often taken very seriously by traders due to its potential to signal impending trend reversals.

What are Harami Candlestick Patterns?

The word ‘Harami’ is a Japanese term that translates to ‘pregnant’. In the context of technical analysis and candlesticks, it is used to refer to a unique pattern involving two candles. The first is a large candle, whereas the second is a much smaller candle. The smaller candle is often completely engulfed by the preceding larger candle, making it appear as if the larger candle is pregnant with the smaller candle.

The Harami patterns are trend reversal patterns, meaning that their appearance during a prevailing trend may indicate a potential reversal in the direction. The direction of reversal depends on the type of pattern that emerges. There are two different types of Harami candlesticks you need to know about - bullish Harami and bearish Harami.

Exploring the Bullish Harami Candlestick Pattern

The bullish Harami candlestick pattern features two candlesticks - a large red candle immediately followed by a small green candle. The large red candle must fully engulf the small green candle.

Interpreting the Bullish Harami Candlestick Pattern

The bullish Harami candle usually appears during a downtrend or when an asset is consistently making lower lows.

The long red candle in the pattern indicates the large number of sellers in the asset. The sudden appearance of a second green candle during a prevailing downtrend indicates the influx of buyers in the market.

The buyers cause a gap-up opening in the asset and continue to purchase the asset, which pushes the price upward. However, the buying pressure is not intense enough to push the price beyond the long red candle’s opening price.

The appearance of a bullish Harami candle during a downtrend usually indicates a potential reversal of the trend from bearish to bullish.

Exploring the Bearish Harami Candlestick Pattern

The bearish Harami candle pattern is the exact inverse of the bullish pattern. It also features two candlesticks - a large green candle immediately followed by a small red candle, where the larger candle fully engulfs the smaller candle.

Interpreting the Bearish Harami Candlestick Pattern

The bearish Harami candlestick usually appears during an uptrend or when an asset is making low highs consistently.

The long green candle in the pattern indicates the large number of buyers in the asset. The sudden appearance of a second red candle during a prevailing uptrend indicates the influx of sellers in the market.

The sellers cause a gap-down opening in the asset and continue to exert selling pressure on the asset, which pushes the price downward. However, the selling pressure is not strong enough to push the price lower than the long green candle’s opening price.

The appearance of a bearish Harami candle during an uptrend usually indicates a potential reversal of the trend from bullish to bearish.

How to Trade the Harami Candlestick Patterns?

When formulating a trading strategy for the Harami candlestick patterns, you must be mindful of three things - the entry, the stop-loss and the profit target. Considering these three factors will help you manage risk more effectively and maximise potential returns.

  • Entry Point

The point of entry usually depends on your risk profile. For instance, if you are a risk-aggressive trader, you could consider entering into a suitable position as soon as the Harami candle forms to maximise your profit potential. On the other hand, if you are a more conservative trader, you may choose to wait until the trend reversal is confirmed before entering into a position. Although the profit potential would be lesser in this case, the risk would also be far lower.

  • Stop-Loss

The appearance of a Harami candle is not a guarantee of a trend reversal. The market may still move against you. Therefore, it is essential to protect your trade from possible adverse market movements using a stop-loss order.

When trading the bullish Harami candle, the ideal stop-loss point would be slightly below the most recent swing low. In the case of a bearish Harami, the ideal stop-loss point would be slightly above the most recent high. Keeping the stop-loss slightly above the recent low and high points ensures that minor price fluctuations do not trigger your stop-losses.

Alternatively, you could also use support and resistance levels when placing stop-loss orders. For instance, in the case of a bullish Harami, you could place the stop-loss point just below the most recent support level. Similarly, in the case of a bearish Harami, you could place the stop-loss point just above the most recent resistance level.

  • Profit Target

Setting a profit target before entering a position ensures you lock in the potential gains and do not let the trade run over run. The ideal profit target points for the bullish Harami candlestick pattern must be at or near the most recent high. On the other hand, the ideal point for a bearish Harami would be at or near the most recent low.

Conclusion

The bullish and bearish Haramis are one of the more reliable candlestick patterns. However, it is important to remember that their appearance during a prevailing trend does not guarantee any reversal. They must be viewed only as an indicator or an early warning sign of a potential shift in the direction of the trend.

Therefore, before entering into a position based on the appearance of either of these two harami candlestick patterns, it is important to ensure that you first confirm the reversal. Confirmation of the reversal usually comes in the form of a follow-through candle that supports the anticipated reversal direction.

For instance, in the case of a bullish harami, the trend reversal is said to be confirmed if the third candle is also green. In the case of a bearish harami, the trend reversal is said to be confirmed if the third candle is also red.

Confirming the trend reversal before entering into a long or short position, as the case may be, can mitigate risk to a large extent.

Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING.
The asset classes and securities quoted in the film are exemplary and are not recommendatory.
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