Trading Reversals with the Harami Candlestick

One of the most used reversal candle patterns is known as the Harami. Like most candlestick formation patterns, the Harami tells a story about real time sentiment in the market. After the pattern is composed with the closing of the signal candle, then you can look to the following candle to identify a clear bias and risk points.

What is a Harami Candlestick？

The Harami candlestick is a Japanese candlestick pattern that comprises of two candles which indicates a potential reversal or continuation in the market. The word ‘Harami’ is derived from the Japanese word for ‘pregnant’ which is representative of the Harami candlestick pattern. The Harami candlestick pattern can signal both bullish and bearish indications as seen below:

Bullish Harami:

Established downtrend

Leading larger bearish (red) candle

Trailing smaller bullish (green) candle - price gaps up after bearish candle and is contained within the open and close of the leading bearish candle

Bearish Harami:

Established uptrend

Leading larger bullish (green) candle

Trailing smaller bearish (red) candle - price gaps down after bullish candle and is contained within the open and close of the leading bullish candle

As indicated in the images above, the first candle (pregnant candle) is a large candle continuing the immediate trend and the trailing candle is a small candle protruding like a pregnant woman. It is important to note that technically the second candle will gap inside the first candle. However, gapping on forex charts is rare due to the 24-hour nature of forex trading. Therefore, the technically correct version of the Harami is rare in the forex market as gaps are minimal and the second candle often becomes a small inside bar of the first.

The confirming candle is used as a tool to tell traders if the smaller trailing gives life to a reversal or follows the trend with the starting candle. The popularity of the Harami pattern and other candlestick patterns is due to the ability to catch a reversal at the most opportune time with tight risk. This will allow traders to have very favorable risk-reward ratios.

Uses of the Harami Candle in Forex Trading

Advantages of the Harami pattern:

Easy to identify

Opportunity to capitalise on large movements with high risk-reward ratios

Widely used in forex trading

Limitations of the Harami pattern:

Requires confirmation before execution

Trading with the Harami Candle Pattern

The Harami candlestick pattern forms both bullish and bearish signals depending on the validating candle. The forex charts below exhibit both types of Harami patterns and how they feature within the forex market.

In both instances the candle labelled ‘3’ designates the confirmation candle which approves the pattern. With most candlestick patterns, traders can utilise other technical indicators to support the pattern.

Bullish Harami:

The Bullish Harami above represents a continuation of the current upward trend for the EUR/USD pair. This is important to remember because not all Harami patterns indicate reversals.

Bearish Harami:

Why do traders look out for reversal patterns？

Candlestick trading signals are usually divided into reversal patterns or continuation patterns. Continuation patterns can help traders see when the sentiment is likely to keep the prevailing trend going strong.

Reversal patterns help traders recognize when the sentiment that was behind a trend potentially ceases as the pair flips its direction. The formation of the candles contains information from buyers and sellers that indicate these potential reversals. Understanding and being able to notice reversal candlestick patterns like the Harami is beneficial for traders in taking advantage of changes in trends.

Using the Harami Candlestick to Catch Reversals

The popularity of the Harami candlestick pattern is due to how it allows traders to catch a reversal at the most opportune time with tight risk. This can lead to very favorable risk-reward ratios. In order to use the Harami to spot reversal patterns, its important for traders to understand the origin of the candlestick and how it can be used with other technical tools.

Supporting functions of the Harami

When studying candlestick trading to pinpoint market turning points, traders are quickly introduced to the Doji candlestick. The most common principle and first lesson relate to the appearance of the Doji candlestick, which can often represent a pending reversal and an opportune time to enter into a trade.

Although Dojis are only composed of one candle that opens and closes at nearly the same level, and an upper and lower wick out of the body like a “+” sign; the next candle tells the story as to the trade preference you should have.

Once a Doji forms, its important to note using other oscillating indicators or moving averages to find if the pair is in an extreme condition or not. This identifies when candlestick formations are most potent.

The Harami is named because it has the appearance of a ‘pregnant woman’. The first candle is a large candle continuing the immediate trend and the Doji is a small candle protruding like a pregnant woman. The second candle will tell us if the Doji gives life to a reversal or follows the trend with the starting candle.

Harami candlestick reversal pattern example

The chart above shows a Bearish Harami in action on the EUR/CAD currency pair. The daily graph has been in a long-standing established uptrend, but prices have a tendency to retrace along the way. This last retracement was started with the formation of a Harami. With its creation, the market put in its current high then quickly descended 481 pips.

Traders looking to take advantage of the Bearish Harami pattern can add it to any existing trend trading plan. Traders can look to take profits on any existing long trades, or even consider trading a full-out reversal once this pattern appears. Regardless of the trading plan, when adding new components to a strategy traders should be tracking results with a trade journal. This way, over time traders can gauge the effectiveness of price action and candle analysis in trading.

What is a Bullish Harami Pattern？

The Bullish Harami candle pattern is a reversal pattern appearing at the bottom of a downtrend. It consists of a bearish candle with a large body, followed by a bullish candle with a small body enclosed within the body of the prior candle. As a sign of changing momentum, the small bullish candle ‘gaps’ up to open near the mid-range of the previous candle.

The opposite of the Bullish Harami is the Bearish Harami and is found at the top of an uptrend.

The Bullish Harami Cross

Traders will often look for the second candle in the pattern to be a Doji. The reason for this is that the Doji shows indecision in the market. The color of the Doji candle (black, green, red) is not of too much importance because the Doji itself, appearing near the bottom of a downtrend, provides a bullish signal. The Bullish Harami Cross also provides an attractive risk to reward potential as the bullish move (once confirmed) is only just starting.

How to Identify a Bullish Harami on Trading Charts

The Bullish Harami will look different on a stock chart compared to the 24- hour forex market, but the same tactics apply to identify the pattern.

Bullish Harami Checklist:

Spot an existing downtrend

Look for signals that momentum is slowing/reversing (stochastic oscillators, bullish moving average crossover, or subsequent bullish candle formations).

Ensure that the body of the small green candle measures no more that 25% of the previous bearish candle. Stocks will gap up, showing the green candle mid-way up the previous candle. Forex charts will mostly show the two candles side by side.

Observe that the entire bullish candle is enclosed within the length of the previous bearish candles body.

Look for confluence with the use of supporting indicators or key levels of support.

Formation of the Bullish Harami Pattern in the Forex market

The forex market operates on a 24/5 basis which means when one candle closes, another opens at virtually the same level of the previous candles closing price. This is often observed under normal market conditions but can change during periods of high volatility. The Bullish Harami pattern in forex will often look something like this:

The small green candle opens at the same level that the prior bearish candle closes at. This is typically observed in the forex market.

Formation of the Bullish Harami Pattern on Stock Charts

Stocks on the other hand, have specified trading hours during the day and are known to gap at the open for many reasons. Some of those might be:

Company news released after the close of trade

Country/sector economic data

Rumoured takeover bids or mergers

General market sentiment

Therefore, the traditional Harami pattern appears, as seen below for Societe General (GLE FP) which trades on the CAC 40:

Notice how there are numerous areas on the chart where the market has gapped - showing wide open spaces between candles. This is often observed in the stock market.

How to trade the Bullish Harami Candlestick Pattern

Traders can adopt the Bullish Harami using the five-step checklist mentioned earlier in the article. Looking at the chart below on GBP/USD, we can observe the following

There is a clear downtrend.

A Bullish Hammer appears before the Bullish Harami and provides the first clue that the market may be about to reverse.

The bullish candle is no more than 25% the length of the previous candle.

The bullish candle opens and closes within the length of the previous candle.

The RSI provides an indication that the market is oversold. This could mean that downward momentum is bottoming but traders should wait for the RSI to cross back over the 30 line for confirmation.

Stops can be placed below the new low and traders can enter at the opening of the candle following the completion of the Bullish Harami pattern. Since the Bullish Harami appears at the start of a potential uptrend, traders can include multiple target levels to ride out a new extended uptrend. These targets can be placed at recent levels of support and resistance.

How Reliable is the Bullish Harami？

The validity of the Bullish Harami, like all other forex candlestick patterns, depends on the price action around it, indicators, where it appears in the trend, and key levels of support. Below are some of the advantages and limitations of this pattern.

What is a Bearish Harami pattern？

The Bearish Harami pattern is a reversal pattern appearing at the top of an uptrend. It consists of a bullish candle with a large body, followed by a bearish candle with a small body enclosed within the body of the prior candle. As a sign of changing momentum, the small bearish candle ‘gaps’ down to open near the mid-range of the previous candle.

The opposite of the Bearish Harami is the Bullish Harami which is found at the bottom of a downtrend.

How to Identify a Bearish Harami on Trading Charts

Bearish Harami Checklist:

Identify existing uptrend.

Look for signals that momentum is slowing/reversing (stochastic oscillators, bearish moving average crossover, or subsequent bearish candle formations).

Ensure that the body of the small red candle measures no more that 25% of the previous bullish candle. Stocks will gap down, showing the red candle mid-way down the previous candle. The gap is likely not found in forex candlesticks as they will mostly open at the same level as the prior candles close or very close to it.

Observe that the entire bearish candle is enclosed within the length of the previous bullish candles body.

Look for confluence with the use of supporting indicators, key levels of resistance, or other supporting evidence to support trade.

It's important to note, the Bearish Harami candlestick pattern will look different when observing it on a stock chart compared to the 24-hour forex market. Below we explore the formation of the pattern on both.

Formation of the Bearish Harami Pattern in the Forex market

The forex market operates on a 24/5 basis which means when one candle closes, another opens at virtually the same level of the previous candles closing price. This is often observed under normal market conditions but can change during periods of high volatility. The Bearish Harami pattern in forex will often look something like this:

The small red candle opens close to, or at the level that the prior bullish candle closed at. This is typically observed in the forex market.

Formation of the Bearish Harami Pattern in Stocks

Stocks on the other hand, have specified trading hours during the day and are known to gap down at the open for many reasons. Some of those might be:

Negative company news released after the close of trade

Country/sector data - viewed via an economic calendar which is worse than expected.

Regulatory changes that will negatively affect future earnings

General (negative) market sentiment

Therefore, the more traditional Harami pattern appears, as seen below for FTSE 100 stock, Lloyds Banking Group PLC:

Notice how there are numerous areas on the chart where the market has gapped - showing wide open spaces between candles. This is often observed in the stock market.

How to Trade the Bearish Harami Candlestick Pattern

Traders can adopt the Bearish Harami 5-step checklist mentioned earlier in the article. Looking at the USD/SGD chart from earlier, we can observe the following:

There is a clear uptrend.

The RSI provides an indication that the market is overbought. This could mean that upward momentum is waning however, traders should always wait for the RSI to cross back over the 70 line for confirmation.

The bearish candle is no more than 25% the length of the previous candle.

The bearish candle opens and closes within the length of the previous candle.

This Bearish Harami appears at a new high so traders should be aware that the market has turned lower from even lower highs previously. Subsequent price action also helps support the new downward momentum indicated by the Bearish Harami.

Stops can be placed above the new high and traders can enter at the open of the candle following the completion of the Bearish Harami pattern. Since the Bearish Harami appears at the start of a potential downtrend, traders can include multiple target levels to ride out a new extended downtrend.