Harami Candlestick Pattern: Candlestick patterns are the reliable technical analysis tools used by market participants to understand and predict the price movements of securities.
Here, we shall discuss one of the important type of multiple candlestick pattern, i.e., Harami Candlestick pattern. It is a trend reversal candlestick pattern used by traders to build reversal strategies in the market.
What is Harami Candlestick Pattern?
Harami is a Japanese word which means the pregnant woman. A simple understanding of this candlestick pattern will add meaning to why it is referred to as harami.
The Harami candlestick pattern is a multiple candlestick pattern which involves two candles in which, one large candle is followed by a small candle and usually the second candle colour will be opposite of the first candle.
It helps traders to identify potential trend reversals in a security, it can be either a bullish or a bearish reversal.
The pattern formation looks similar to a lady carrying a baby in her womb, the first candle refers to the mother and the second candle is the baby in the womb, so the Japanese name Harami arrived.
Types of Harami Candlestick Pattern
Basically, there are two types of Harami candlestick patterns which signal a potential trend reversal.
- Bullish harami candlestick pattern
- Bearish harami candlestick pattern
Here, we shall understand the types of patterns one by one with the help of charts.
Bullish Harami Candlestick Pattern
A bullish harami pattern is a bullish reversal pattern appearing at the bottom of a long downtrend.
The first candle of the pattern with a prior downtrend is a large red candle that indicates the bears are in control pushing the prices lower.
The second candle of the pattern will be a small green candle with its opening price higher than the closing price of the previous candle.
As the market gains strength, the second candle ends in green With its closing price just below the opening of the previous red candle.
As the bulls gain control, the trend is reversed from downtrend to uptrend with a price making new highs. It signals traders to take a long position in security.
Trading Setup with Bullish Harami Pattern
Here, we shall see how to spot entry, stop loss and target levels for a long position signalled by a bullish harami pattern.
Entry:- When a valid bullish harami pattern is formed, one can enter a long position. As entry is preferred after the confirmation, place an order at the close of the next green candle.
Stoploss: The stop loss for a long position is placed at the lowest low of a bullish harami candlestick pattern.
Profit Target: Targets are preferred based on traders’ risk-reward ratios, a 1:2 risk-reward ratio is preferred as a safe target.
Above is the chart of Axis Bank showing the formation of a bullish harami candlestick pattern after a strong downtrend. Traders can enter a long position here with predefined entry and stop-loss levels as shown in the chart.
Bearish Harami Candlestick Pattern
A bearish harami pattern is a bearish reversal pattern appearing at the top of a long uptrend.
The first candle of the pattern with a prior uptrend is a large green candle that indicates that bulls are in control pushing the prices higher and higher.
The second candle of the pattern will be a small red candle with its opening price lower than the close of the previous candle.
As the market gains strength downside, the second candle ends in red With its closing price just above the opening of the first candle.
As the bears gain control, the trend is reversed from uptrend to downtrend with its price making new lows. It signals traders to take a short position in security.
Trading Setup with Bearish Harami Pattern
Here, we shall see how to spot entry, stop loss and target levels for a short position signalled by a bearish harami pattern.
Entry:- When a valid bearish harami pattern is formed, one can enter a short position. As entry is preferred after the confirmation, place an order at the close of the next red candle formed.
Stoploss:– The stop loss for a short position is placed at the highest high of a bearish harami pattern formed.
Profit Target: Targets are preferred based on traders’ risk-reward ratios, a 1:2 risk-reward ratio is preferred here.
Above is the chart of HDFC Bank showing the formation of a bearish harami candlestick pattern after a strong uptrend. Traders can enter a short position here with predefined entry and stop-loss levels as shown in the chart.
Limitations of Harami Candlestick pattern
- It is not always reliable, as the pattern can produce false signals based on market conditions.
- Completely can’t rely on the pattern itself. So, the use of other technical tools in conjunction is preferred.
- The frequent pattern formation can lead to overtrading without proper analysis.
- Without a valid pattern formation and confirmation false identification of a pattern leads to false trade.
In Closing
Traders use the harami candlestick pattern to take advantage of trend reversals either on the bullish or the bearish side.
Also, for valid trade setups, traders are advised to use other technical analysis tools like indicators or chart patterns in conjunction with harami patterns as a confirmation for valid trades.
Written by Deepak M
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