Bullish/Bearish Harami Cross Pattern in Candlestick Trading


Learning to read the trends of investment trading, such as the stock market, is essential for anyone who works in jobs with regular trading or likes to trade securities. An excellent tool for figuring out the current trends in the securities market is using candlestick trading patterns. These patterns can help you know if now is the time to trade or not.

Harami Cross Patterns are candlestick trading patterns that depict the indecision of buyers in the current trend in the market. This means that the pattern shows whether the prices in the market might be about to go up or down. There are two different types of Harami Cross Patterns because indecision can be for either a downward trend or an upward trend.

In the remainder of this article, we’ll discuss the Harami Cross Pattern in greater detail, from the types of patterns that exist and how to identify and interpret them, to how to use them in trading.  

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Types of Harami Cross Candlestick Patterns

A trend in the market can either reverse from a low-cost market to a high-cost market or from a high-cost market to a low-cost market, but first investors look at the current indecision in the market. These two different trends can be indicated by a Bullish Harami Cross Pattern or a Bearish Harami Cross Pattern.

Bearish Harami Cross Pattern

A Bearish Harami Cross Pattern suggests to market buyers that the market might be about to experience a reversal in trend and start decreasing in price. To show this, a candlestick located higher up on the charts will be followed by a doji (cross). The first day is represented by the large and highly located larger candlestick while the doji represents the next day. 

The doji is typically located within the parameters of the candlestick. The doji indicates that there was indecision with buyers the previous day, and the market might be starting a downward trend. The trend is either proven the next day and confirmed with a drop in price or is not and invalidated.

Bullish Harami Cross Pattern

A Bullish Harami Cross Pattern indicates that the prices of the market securities might go up the next day. Like a Bearish Cross Pattern, a Bullish Cross Pattern has a large candlestick followed by a doji. However, the candlestick of a Bullish Harami Cross Pattern will be located further down on the chart instead of higher up. 

The doji still must fit within the parameters of the candlestick. While a Bearish Harami Cross Pattern suggests that the securities market might have a decrease in price soon, a Bullish Harami Cross Pattern takes the indecision in buyers from the previous day and determines that the market might experience an increase in price the next day. If an increase does not occur, then the pattern is considered invalid. 

Harami Cross Pattern Interpretation

To understand a Harami Cross Pattern, it’s essential to understand how the candlestick model works. A candlestick is a big box, either black or white depending on how the market performed that day, with a line drawn through it to represent the range of prices for the day. 

  • A Bullish Cross Pattern usually has a candlestick with a black box, with the black box indicating the market closed lower than it opened. 
  • A Bearish Cross Pattern usually has a white boxed candlestick, indicating the market price closed at a higher price than when the market opened. 

A doji, which looks like an enlarged cross, indicates a soft prediction of how the market will act the next day. This shows that the buyers had reached a place of indecision by closing time the day before. Most traders wait for the Harami trend to be confirmed before acting to buy or sell stocks. This confirmation comes in the form of a second candlestick replacing the doji; this means the trend is most likely to happen.

How to Trade Harami Cross Patterns in Candlestick Trading?

Because Harami Cross Patterns only represent indecision in buyers’ minds, it can be hard to trade securities on this pattern effectively. To effectively trade a Harami Cross Pattern, the trader must use the pattern in conjunction with another market reading method.

Strategy 1: Using Harami Cross Patterns with a Trailing Stop Loss

Since Harami Cross Patterns are not guaranteed to occur, using a stop loss is an excellent way to determine whether a trader buys market shares.

The Market Environment

The nature of a stop-loss system allows a buyer flexibility within the market.  Any market environment is conducive to a stop-loss order, as the order only goes into effect when a designated price is reached.

Identify and Confirm Trading Opportunity

A stop-loss order will either order more or sell a chosen number of market shares when the market price of the market share hits a price you designate. Therefore, a stop-loss order won’t occur unless the market share’s price lowers or rises to the designated level. This confirms whether the market was entering a more expensive price trend or a decreasing price trend. 

A trailing stop-loss order can set the buy or sell level at a percentage of the market share price increase or decrease. 

Determine Stop Loss Levels

The price at which a stop loss is set is usually determined by the trader and the previous performance of the market share you are interested in buying. A market share that is known never to go higher than this price can be set up to sell shares when the said price is hit. 

You can also use the market share opening price or closing price to determine how much of an increase or decrease you are comfortable with selling or buying then reserve the order with a trailing stop-loss order. 

Execute and Manage Order

Placing a stop order is always an excellent accompaniment to a Harami Cross Hair since you won’t buy the market share if the Harami Cross Pattern trend proves to be inaccurate.

Strategy 2: Using a Harami Cross Pattern with a Risk/Reward Ratio

A risk/reward ratio can help you determine whether following a Harami Cross Pattern Indication is worth the risk it could incur.

Market Environment 

A risk/reward ratio trading strategy is reliant on a market that has shown to follow predicted trends often as well as a market with little trend divergence and little need of correcting. The method also works better with market shares that are expected to make significant movements.

Identify and Confirm Trading Opportunity

A risk/reward ratio contrasts how much money you are putting into a market share compared to how much money you stand to gain if the market prediction turns out to be accurate. The calculation is usually done by comparing the amount of growth predicted by showing how much you will make on a dollar. 

In this manner, a 1:6 ratio means that for every dollar you risk in the investment, you could potentially earn six dollars if the market prediction is followed. For this strategy, a higher discrepancy between the two numbers determines whether an investment is worth the risk. A 1:10 risk/reward ratio is much more worthy of pursuit than a 1:2 ratio.

Determining Trade Entry

For this method, trade entry can be made known at the opening of market share trading time, suggesting if following through on the investment would be wise or not.

Execute and Manage Order 

Once you have determined that a risk is worth the potential reward of a definite trend, you must buy the stocks the day of. This method is a little riskier because you have bought the stocks even if the Harami Cross Pattern method proves to have been inaccurate. It is best to use this method on huge differences between ratio numbers and with only a little money on the first day.

Author’s Recommendations: Top Trading and Investment Resources To Consider

Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.

Conclusion

Harami Cross Patterns in Candlestick Trading can give a decent indication of a possible trend reversal in the future but rely on buyer chatter and is, therefore, not a reliable method to use for investing by itself. 

While a doji might suggest that a market share might start decreasing in price, buyers can always change their minds, so it is best to use multiple methods for trading, such as stop losses or risk/reward analysis while attempting to follow the Cross Pattern Trade.

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    Navdeep Singh

    Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes.

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