What is the Harami Candlestick Pattern?

Harami is a Japanese candlestick pattern composed of two candlesticks. The first is a larger black or red body, and the second is a smaller white or green body. The pattern's name, "Harami," comes from the Japanese word for "pregnant," as the graphic representation resembles a pregnant woman.

This candlestick pattern consists of two candles: the first candle is larger and the second candle is smaller and contained within the first candle. It is a potential indicator of a bullish or bearish reversal in the market.

A Harami pattern consists of two candles:

The first candle is a large candlestick, often called the "mother" candle.
The second, smaller candle, the "baby," is completely engulfed by the first candle's body.

The key here is the second candle, which opens and closes within the body of the first. This pattern suggests a potential reversal in market trends, providing traders with valuable foresight.

Bearish Harami vs Bullish Harami

The Harami pattern can signal both bullish and bearish market conditions, depending on its formation:

Bearish Harami:

Formation: This pattern appears after an uptrend. The first candle is bullish (white or green), followed by a smaller bearish (black or red) candle.
Interpretation: It indicates that the upward momentum is weakening, and sellers might be gaining control. This often leads to a price decline, signaling a bearish reversal.

Bullish Harami:

Formation: This pattern occurs after a downtrend. The first candle is bearish, and the second is a smaller bullish candle.
Interpretation: It suggests that the downward momentum is losing steam, and buyers may be stepping in. This typically results in a bullish reversal, with prices potentially rising.

Live Market Example

To better understand these patterns, let's consider a live market example. Imagine Bitcoin has been on a consistent upward trajectory, forming a series of green candles. Suddenly, a large green candle is followed by a smaller red candle, entirely engulfed within the previous day's range. This formation is a textbook Bearish Harami, indicating that the bullish trend might be over, and a bearish reversal could be imminent.

Live Example From CoinEx Exchange Page (July 17)

Live Example From CoinEx Exchange Page (July 17)

Conversely, if Ethereum has been declining and a large red candle is followed by a smaller green candle within its body, it forms a Bullish Harami. This pattern hints at a potential shift towards a bullish trend.

How to Trade with Bearish and Bullish Harami

Trading with the Bearish Harami requires a keen eye for detail and a disciplined approach:

Bearish Harami Pattern with A MACD Indicator

The example above illustrates the same bearish Harami pattern as before, but with a MACD indicator added to the chart's lower panel. In this strategy, the MACD indicator helps identify instances where the momentum of a bullish or bearish trend begins to decline before the formation of a Harami pattern.

Notice how the momentum, as shown by the MACD indicator, significantly declined even though the market reached a higher high. When a market creates a new higher high (or lower low) but the momentum starts to decrease, it is referred to as momentum divergence. This means that momentum is moving in the opposite direction of the market’s price.

Momentum divergence is another indication that a trend reversal may be approaching. In this strategy, it provides additional confirmation that the Harami pattern could lead to a high-probability trade setup.

Image for illustrative purposes only

Let’s move on to the trade entry and order placement strategy.

There are two approaches to entering a short position following a Harami pattern: the aggressive method and the conservative method.

The aggressive method involves entering a short position as soon as the low of the smaller red candle is breached, as shown by the blue aggressive sell entry level in the chart above.

The conservative method involves entering a short position once the low of the first green candlestick is broken to the downside, as indicated by the orange conservative sell entry level in the chart above.

For both entry methods, a stop-loss can be placed above the high of the green candlestick. Targets for both methods can be set at a level that offers twice the reward relative to the risk taken.

Image for illustrative purposes only

To effectively trade the bullish Harami forex pattern, it's crucial that the MACD indicator also shows momentum divergence as an additional confirmation. In the example above, there was a distinct momentum divergence between a prior market low and a subsequent lower low before the bullish Harami pattern appeared.

For illustration purposes only.

Once the ideal conditions were met and the second green candlestick of the Harami forex pattern closed, trade orders were executed using the previously mentioned entry methods.

Both the bullish and bearish Harami pattern examples above led to strong reversals, hitting their trade targets.

It's important to note that not all Harami pattern setups will result in profitable trades — that's the inherent nature of trading. However, by using additional confirmation methods such as the MACD indicator, you increase the likelihood of trading setups with the highest probability of success.

Conclusion

Understanding candlestick patterns is a cornerstone of technical analysis, providing traders with insights into potential market movements. The Bearish Harami and Bullish Harami patterns are particularly valuable, as they signal potential reversals in prevailing trends. By identifying these patterns and confirming their signals with additional technical indicators, traders can make informed decisions to capitalize on market opportunities.

Both the Bearish Harami and Bullish Harami patterns reflect shifts in market sentiment and can serve as early indicators of changing market dynamics. Mastering these patterns can enhance your trading strategy, enabling you to enter and exit trades more effectively.

FAQs:

1. What is the difference between Harami and Doji?

While both Harami and Doji patterns are significant in technical analysis, they differ in formation and interpretation:

Harami: Consists of two candles with the second being engulfed by the first. It signals a potential reversal depending on its bullish or bearish formation.
Doji: A single candlestick where the open and close prices are nearly identical, indicating market indecision. The Doji can be a precursor to a significant price move but requires additional confirmation.

2. What is the psychology behind the Harami pattern?

The Harami pattern reflects market psychology and sentiment shifts:

Bearish Harami: After a strong uptrend, the appearance of a smaller bearish candle within a larger bullish one suggests that buyers are losing strength, and sellers are beginning to dominate. This shift in control can lead to a trend reversal.
Bullish Harami: Following a downtrend, the emergence of a smaller bullish candle within a larger bearish one indicates that sellers are weakening, and buyers are starting to take over. This change in sentiment often precedes an upward price movement.

Understanding these patterns and their underlying psychology can enhance a trader's ability to anticipate market changes and make more informed trading decisions.