Harami is a Japanese word. The world came to know about candlesticks from Japan. in Japan in the early 1600s, these forms of charting were used to forecast future rice prices.
Harami in Japanese means the conception or pregnant woman. The combination of candlesticks aptly describes this meaning.
What is Harami Candlestick Pattern?
The Harami candlestick pattern involves two candles. One large candle precedes a small candle. And the body of the large candle completely engulfs the body of the next smaller candlestick. The pattern looks as if a lady carrying a baby in her womb. That is why the candlestick pattern was named Harami in Japanese.
The first candlestick is seen as the mother completely enclosing the body of the second candle which is seen as the baby. Thus this combination gives the idea of a pregnant lady, a mother carrying a baby in her womb.
Read more: List of important candlestick patterns
What does a Harami pattern indicate?
The Harami candlestick pattern usually gives us the trend reversal signals. Different types of Harami candlestick patterns give trend reversal signals. The trend reversal signals can be either bullish trend reversal or bearish trend reversal.
The strength of the signal depends on how the pattern was interpreted by the trader. These signals can only give the potential reversal trends, but this can not be decisive. The trader has to take decisions depending on the market scenario.
What are the 2 types of Harami Candlestick patterns?
There are basically two types of Harami candlestick patterns on the basis of interpretation.
One is the Bullish Harami Pattern which gives a bullish trend reversal signal.
Here the bullish harami candlestick pattern shows a large red candle followed by a small green candle. This is typically what the bullish harami pattern looks like.
There is another pattern known as the bearish harami candlestick pattern.
The bearish harami pattern is formed by two candlesticks. A large green candle followed by a small red candle. This is what a typical bearish Harami pattern looks like.
There is also another pattern commonly known as Harami Cross. We will talk about this later.
What is a Bullish Harami Candlestick pattern?
A bullish Harami pattern gives a potential signal of the trend being reversed and bulls taking control over the bears. This candlestick pattern typically occurs at the bottom of a downtrend and the stock is in an oversold position.
This candlestick pattern is opposite to the appearance of a bullish engulfing pattern. Though both the patterns indicate a potential bullish uptrend after a long downtrend.
The bullish Harami pattern in the chart above is shown by a pink coloured shade. In this chart, we can see the pattern occurred at the bottom of the long downtrend. The downtrend is shown by the long downward arrow.
At the bottom of the downtrend, in this chart, there is a long red candle. Followed by the long red candle there is a small green candle. This combination is the bullish harami pattern. This pattern can also be interpreted by a pregnant mother. The baby is small and green in colour.
After the pattern is complete, we can see that a strong uptrend has emerged. This pattern also confirms that a bullish trend reversal has taken place. A trader may see this as the potential trend reversal when the pattern is being formed.
1. Bullish Harami confirmation pattern
A typical Bullish Harami candle pattern also gives confirmation on the third or fourth candle. Here, in the diagram above, we can see the third candle is a green candle confirming the uptrend. In the earlier bullish Harami diagram, we have seen that the fourth candle is a large green candle which gave confirmation of a new uptrend.
The confirmation candle should close above the previous green candle. The trader may enter the trade after getting confirmation from the chart pattern.
2. How to set up trade with a bullish harami pattern?
The following figure shows how to trade with a bullish harami pattern.
In this pattern, the first candle is a red candle which is a part of the existing downtrend. The next candle is a small green candle that completes the Harami pattern.
As we can see, the trade entry should be above the high of the second candle. It is best to take the trade on the third or fourth day when we get the confirmation candle.
The confirmation candle should close above the high of the second candle, Therefore if a trader takes entry near the closing of the third or fourth day when the confirmation candle is about to close above the second candle, it should increase the chance of a successful entry.
3. How to set a target & stop loss with a bullish harami pattern?
When a bullish harami is confirmed by a third or fourth confirming candle that is closing above the Harami candle, i.e. second green candle, a trader may enter the stock. This chart shows a Harami candlestick pattern that was formed after a long downtrend (shown by a green rectangular box). The third candle gives confirmation by closing above the high of the second candle.
The trader is supposed to buy the stock near the close of the third candle (confirmation candle).
The stop loss should be just below the low of the first red candle.
Now, if we are trading at a 1:2 risk-reward ratio, the trader may exit at or near the double the trading price – the stop-loss price. Else, if the condition favors the trader, the trader may continue staying in the trade till the next downtrend occurs.
What is a Bearish Harami Candlestick pattern?
A bearish Harami pattern gives a potential signal of the trend being reversed and bears taking control over the bulls. This candlestick pattern typically occurs at the top of a downtrend and the stock is in an oversold position.
This candlestick pattern is opposite to the appearance of a bearish engulfing pattern. Though both the patterns indicate a potential bearish downtrend after a long uptrend.
The chart indicates where the bearish harami pattern was formed. It was formed right at the top of a long uptrend. At that time the stock reached an overbought zone. After the pattern, the downtrend started.
The pattern was formed by a long green candle followed by a small red candle. The green candle showed the existing uptrend. And the Harami pattern started the downtrend with consecutive red candles.
1. Bearish Harami confirmation
We can see the bearish Harami confirmation above. There is a third candle that closes below the second red candle or the harami candle. This confirmation candle shows that the downtrend has started.
The confirmation candle must close below the second candle. And the trader should take an entry near the close of the confirmation candle.
2. How to set up trade with a bearish harami pattern?
As is true with other indicators, Harami patterns also need confirmation from other indicators. Here in this chart, e have made use of the Bolinger bands along with candlesticks. As indicated in the chart, when the bearish Harami pattern occurred, the Bollinger bands also showed that the stock is extremely oversold and is therefore ripe for a reversal to occur.
The trader will short sell on the confirmation candle, below the low of the second candle, At this time, the third candle has also shown that it is coming down from the Bollinger band extremes. It is the right time to enter a sell/ short trade.
The stop loss should be placed above the high of the first candle.
The trader should exit the trade when the currency pair reaches the other extreme band of the Bollinger band.
A cautious trader, who is trading at a 1:2 risk-reward ratio, may exit when the candle goes over the double of the high of the first candle – selling price.
3. How to set target & stop-loss with a bearish harami pattern?
In the chart above, a typical bearish Harami pattern trade has been explained. The trade entry is just below the second candlestick. The stop loss is just above the high of the first candle.
Here the profit was taken at the last green candle. The last red candle is followed by a big green candle. The exit trade was taken at the last green candle when the high of the previous red candle was broken. It shows there is a possibility that the downtrend was potentially broken.
Identifying Bullish and Bearish Harami on a Trading Chart
Till now we have been explaining the ideal conditions of Bullish and Bearish Harami patterns and how to ideally profit from trades using those patterns.
But during the day-to-day trading, we rarely get see to ideal conditions developing for trading. And the chart formations are always not ideal. The chart above shows us how actually these Harami patterns are found that may not be ideal.
In both of the above cases, the stop loss was triggered before the trade actually appeared. The first chart (from the left) shows the bearish harami pattern. The pattern is marked with a shade. It can also be seen that the following candles repeatedly touched the stop-loss mark before the downtrend actually appeared.
Similarly in the second case also, as seen in the diagram on the right, after the pattern appeared, the stop-loss line was repeatedly hit before the real move occurred.
In both above cases, proper interpretation of the chart is required. The trade entry and exit depend on the trader’s decision. Only a chart alone is not enough.
What should you know more about harami?
Investors looking to identify harami patterns must first look for daily market performance reported in candlestick charts. Harami patterns emerge over two or more days of trading, and a bullish harami relies on initial candles to indicate that a downward price trend is continuing.
The bullish harami indicator is charted as a long candlestick followed by a smaller body. Sometimes it is a Doji, that is completely contained within the vertical range of the previous body.
Similarly, for a bearish Harami, a long green candle may be followed by a Doji pattern. Therefore, in both of these cases, a confirmation pattern is vital before entering into a trade,
What is the difference between the Engulfing pattern and a Harami pattern?
There is a distinct difference in appearance between a Harami pattern and an engulfing pattern.
An engulfing pattern has two candles, the first one is a small candle and the next one is a large candle that completely engulfs the length of the previous candle.
But the Harami pattern looks just the opposite. There is a large candle that is followed by a small candle. This is a major difference, which is in appearance. Functionally they give similar signals.
Must read: Engulfing Candlestick Pattern
Does the Harami pattern guarantee accuracy?
The Harami patterns have an accuracy rate of around 55.8%. A report tested all the 4120 markets and has come up with these statistics. Historically, when the patterns worked, within 2.7 candles the trend showed decisively. On the contrary, when there were false signals, the stop-loss mark was breached within 3.8 candles.
Overall, there is a profit percentage of 21.9%. With a 1:2 risk-reward ratio, a trader can earn 40.6% of the time.
Is your risk-reward ratio enough?
The 1:2 risk-reward ratio works best in this pattern. A 1:1 ratio may not be profitable and in a 1:3 ratio, the trade becomes riskier.
Therefore it is advised to maintain a 1:2 risk/ reward ratio.
What is a Harami Cross?
The Harami cross pattern is when the second candle looks like a Doji candle. It appears both in bullish Harami pattern and bearish Harami pattern. Basically, it is a combination of the Harami pattern with the star Doji.
The star Doji looks like a plus sign. But the Harami candlestick pattern principle applies here also. The star Doji should have small wicks and should be completely engulfed by the large previous candle.
Trading Forex with Harami pattern
The forex traders extensively use candlestick patterns. In fact, in this article, a forex trading example has been used. Even the accuracy data included forex trading data.
The bottom line
All traders, including the forex and the cryptocurrency traders, use Harami candlestick patterns. Traders using Harami patterns enjoy a trade advantage with a proper risk/ reward ratio.
But using Harami pattern trades does not guarantee accuracy. Therefore it is best to take trade confirmation from other oscillators/ indicators.
Hence for the best trading result, a trader should take trade confirmation from other technical analysis tools and closely look at support/ resistance levels and the market trend.
For, example, a trader may use a 200-day moving average to ensure the market is in a long-term downtrend and take a short position when a bearish harami forms during a retracement.