Candlestick patterns are a great tool that provides a large amount of technical data to help analyze market trends. One of the most beginner-friendly patterns used in candlestick analysis is the Harami pattern, but what is it?
The Harami Pattern is a reversal pattern seen in Candlestick Trading. It can be bearish or bullish. It is indicated by:
- An established upward or downward trend, followed by:
- A gap in opening/closing price compared to the previous candlestick
- The candlestick being completely contained within the length of the body of the previous candlestick
Being able to spot Harami patterns is key to successfully reading candlestick charts. We’ll go more in-depth on their types, how to read them, and how they can affect your trading strategy, so read on!
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Table of Contents
What Is a Harami Candlestick Pattern?
A Harami pattern in a candlestick chart occurs when there is uncertainty in the market. It has some specific unique characteristics that we’ll cover below, but the concept is simple at its base.
A Harami occurs when the price of a security stops trending in one direction and shows that its momentum has slowed. Different from some other patterns, it doesn’t explicitly show any reversal of the trend, only that the trend has become fairly weak. This can, but does not always, signal that a reversal may be about to occur.
Types of Harami Candlestick Pattern
Harami patterns can be either bullish or bearish—but the core principle is the same. Since it is a reversal pattern, it will occur when there is uncertainty in the market.
Bullish Harami Pattern
A bullish Harami pattern occurs when the market has been trending down, but a Harami pattern shows that it may be on an upward trend again.
Bearish Harami Pattern
A bearish Harami pattern occurs when the market has been trending up, but the Harami pattern shows it may trend downward again.
How to Identify Harami Pattern in Candlestick Trading?
Harami patterns have a very distinct look to them. Their namesake, “harami,” means pregnant in Japanese. The pattern looks a bit like a pregnant woman, hence the name.
Construction of Harami Pattern
A Harami pattern is composed of:
- Two consecutive candlesticks (one leading, one trailing)
- A noticeable size difference between the two
- A shape that can be contained within a “D” drawn over it
Key Characteristics of Harami Pattern
The Harami pattern is among the easiest to identify because of the simplicity of its characteristics.
There are three main criteria for a Harami pattern:
- The market must have an established trend (down for bullish Harami, up for bearish)
- The leading candle must be larger than the following one
- The trailing candle’s full length must be contained within the body of the previous candlestick
How to Interpret Harami Pattern?
A Harami pattern typically shows that there is some uncertainty in the market. There can be some variation in the exact sizes of the candlesticks involved which affects the likelihood of the pattern indicating a real reversal.
For example, the size of the trailing candle can indicate the likelihood of an actual reversal. In general, remember that the larger difference in size between the two candles, the more likely it is to be signaling a true reversal.
How to Improve the Reliability of Harami Pattern in Candlestick Trading?
The Harami pattern on its own should not be used as a sole indicator of a reversal. Like many patterns, it should be accompanied by other indicators that you can use to verify your suspicions.
Verification Candle
One easy way to help strengthen a Harami pattern is to use a third candle to verify the reversal. For example, if you see a Harami occur after a downtrend, wait to see the third candle that follows the Harami. If the third candle shows the pattern continuing the upward or downward trend as predicted, that is a good extra point of verification.
RSI Verification
Like any trading pattern, it’s important to include an RSI evaluation in your analysis. RSI stands for the “Relative Strength Index” of a given trend. You can think of it as a measurement of the overall strength of any given trend based on all the ups and downs.
For example, if you have an RSI over 70 (indicating it is likely overbought) accompanying your bearish Harami pattern, you can likely assume it will continue to trend down.
Double and Triple Top Indicators
Another strong indicator that pairs well with a Harami is either a double or even better, triple top pattern. This happens when the top of the candles peak twice (or three times, in case of a triple) before the Harami pattern occurs. This can strongly suggest a reversal is about to take place, as the price seems likely to breakout in the direction of the peaks.
How to Trade Harami Pattern in Candlestick Trading?
Harami patterns can pair with many trading strategies, but they work really well when integrated with Bollinger Bands. When trading harami pattern in combination with the Bollinger bands, below are a few things that you should consider in your trading plan –
Market Environment
A Bollinger Band + Harami trading strategy can be employed in any type of market, but it works best when a market is not especially volatile.
Identify and Confirm Trade Opportunity
Once you spot a Harami meeting the edge of the band, use some of the methods we discussed above, like RSI, to help verify that it is an actual reversal and good trade opportunity.
Determine Trade Entry, Stop Loss, and Take Profit Levels
In order to find a good entry point for this strategy, wait until the edge of the Bollinger Band goes above or below a Harami. If the Harami is bearish, wait until the band goes below the second candle of the Harami. If it is bullish, wait until the band goes above.
The stop commands for this trade should be given when the next reversal candle also meets the band. This will be a bearish candle if you started the trade on a bullish Harami, and vice versa.
Execute and Manage Trade
Once you start the trade, keep an eye for any sharp changes in the market while watching the RSI numbers. If those give a strong indication a reversal may happen before the Bollinger Band looks like it will meet the candles, it may be wise to end the trade. If a reversal happens before the Bollinger Band meets the candles and executes your stop command, it could cause undue losses.
Advantages and Limitations of Trading Harami Pattern
While Harami patterns can be used reliably (especially with extra confirmation from other sources like RSI), there are still some disadvantages of trading Harami patterns.
In trading this pattern, it is critical to account for its advantages and limitations. Therefore, in the following sections, let us discuss several pros and cons of trading this pattern.
Advantages of Trading Harami Pattern
Listed below are the primary advantages of trading the harami pattern –
- It is easy for inexperienced traders to identify
- It only requires two candles to identify
- It can signal both a bearish and bullish trend
Limitations of Trading Harami Pattern
Listed below are the primary limitations of trading the harami pattern –
- It has limited prediction ability
- It needs extra predictors to help identify and confirm trends
- It does not always signal a reversal
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Conclusion
While there are many patterns that can be useful when looking at candlestick charts, the Harami pattern is a good one to add to your playbook.
To recap, remember that a Harami pattern is identified by:
- An established upward or downward trend, followed by:
- A gap in opening/closing price compared to the previous candlestick
- The candlestick being completely contained within the length of the body of the previous candlestick
Also remember that while it is easy to spot, you should definitely be pairing it with other trend indicators. This can include a third candle for verification or looking at an RSI score.
Now that you know what to look for, you’ll be seeing Harami patterns all over the place in your market data and you’ll know what to do about them!
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