Understanding Harami Candlestick Patterns – Types and Strategies

Harami Candlestick Pattern: Candlestick patterns are a reliable technical analysis tool used by market participants to understand and predict price movements in securities.

Here we will explain the Harami candlestick pattern, one of the important types of multiple candlestick patterns. This is a trend reversal candlestick pattern that traders use to build reversal strategies in the market.

What is Harami Candlestick Pattern?

Harami is the Japanese word for pregnant woman. A simple understanding of this candlestick pattern will add more meaning to why it is called harami.

The harami candlestick pattern is a multiple candlestick pattern involving two candles, one large candle followed by a smaller candle, and usually the color of the second candle is opposite to that of the first candle.

This helps traders identify potential trend reversals in a security, which may be bullish or bearish.

The shape of the pattern resembles a woman holding a baby in her womb, with the first candle meaning the mother and the second candle meaning the baby in the womb, hence the origin of the Japanese name Harami.

Types of Harami Candlestick Patterns

There are basically two types of Harami candlestick patterns that indicate a possible trend reversal.

1. Bullish Harami Candlestick Pattern
2. Bearish Harami Candlestick Pattern

Here, we will use charts to understand the types of patterns one by one.

Bullish Harami Candlestick Pattern

The bullish harami pattern is a bullish reversal pattern that appears at the bottom of a long-term downtrend.

The first candle in a pattern with a previous downtrend is a large red candle that indicates that the downtrend is under control and is pushing the price lower.

The second candle in the pattern will be a small green candle whose opening is higher than the closing price of the previous candle.

The second candle ends in the green as the market shows strength. The closing price is just below the opening of the previous red candle.

When the bulls gain control, the trend reverses from a downtrend to an uptrend, causing the price to hit new highs. This signals traders to take long-term positions in the security.

Trading Setup Using Bullish Harami Pattern

Here we will look at how to identify entry, stop-loss and target levels for a long position as indicated by a bullish harami pattern.

entry:- Once a valid bullish harami pattern is formed, you can enter a buy position. We prefer to enter after confirmation, so place your order at the close of the next green candle.

Stop Loss: The stop loss for the long position is placed at the lowest low of the bullish Harami candlestick pattern.

Profit Target: Targets are preferred based on the trader’s risk-reward ratio, with a 1:2 risk-reward ratio being preferred as a safe target.

Above is a chart of Axis Bank showing the formation of a bullish harami candlestick pattern after a strong downtrend. Traders can take long positions here using predefined entry and stop loss levels as shown on the chart.

Bearish Harami Candlestick Pattern

The bearish harami pattern is a bearish reversal pattern that appears at the top of a long-term uptrend.

The first candle in a pattern with a previous uptrend is a large green candle that indicates the bulls are in control to push the price higher and higher.

The second candle in the pattern will be a small red candle whose opening is lower than the closing price of the previous candle.

The second candle ends in red as the market shows a downward trend. The closing price is just above the opening price of the first candle.

As the bears gain control, the trend changes from an uptrend to a downtrend and the price hits new lows. This signals traders to take a short position in the security.

Trade setup using Bearish Harami pattern

Here we will look at how to identify entry, stop loss, and target levels for a sell position as indicated by the bearish Harami pattern.

entry:- Once a valid bearish harami pattern is formed, you can enter a sell position. Since we prefer to enter after confirmation, place an order at the closing price of the next red candle formed.

Stop Loss:– The stop loss for the sell position is set at the high point of the formed bearish harami pattern.

Profit Target: Targets are preferred based on the trader’s risk-reward ratio, where a 1:2 risk-reward ratio is preferred.

Above is a chart of HDFC Bank showing the formation of a bearish harami candle pattern after a strong uptrend. Traders can enter sell positions here using predefined entry and stop loss levels as shown on the chart.

Limitations of Harami Candlestick Pattern

• Patterns are not always reliable as they can produce false signals depending on market conditions.
• You can’t rely entirely on the pattern itself. Therefore, it is recommended to use it in conjunction with other technology tools.
• Frequent pattern formation can lead to overtrading without proper analysis.
• Misidentification of patterns without valid pattern formation and confirmation results in incorrect trading.

Finishing

Traders use the harami candlestick pattern to take advantage of trend reversals on either the bullish or bearish side.

Additionally, for valid trade setups, traders are advised to use other technical analysis tools such as indicators or chart patterns along with harami patterns as confirmation for valid trades.

Written by Deepak M

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