Bullish Harami Candlestick Pattern for Trend Reversal Strategies

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The Harami Pattern

Before you jump to conclusions, ‘Harami’ is not the Hindi word you’re thinking about 😉 In actuality, it is an old Japanese term that means ‘pregnant’. Looking at the candlestick formation should explain why this word was chosen.

The harami pattern is composed of two candles. The first one is usually long, and the second has a much smaller body, and in most cases, they differ in colour. This formation can indicate a potential reversal of the current trend. It can be either a bullish or a bearish variant.

The Bullish Harami

The bullish harami is indicative of a potential shift in trend, as it appears at the bottom of the chart. It forms over two days, similar to the engulfing pattern.

In the chart, the bullish harami pattern has been marked out.

  1. The market is on a downward trajectory, with prices dropping and the bears firmly in power.
  1. On the first day of P1, a red candle with an all-time low is formed, further strengthening the bear’s place in the market.
  1. On P2, the market opens at a price greater than the day before’s close, causing fear among the bears as it is not what they had expected.
  1. The market increased in strength on P2, ultimately forming a blue candle in the close. Despite this, the closing price didn’t manage to exceed P1’s open level.
  1. The price action on P2 forms a small blue candle contained within the larger red candle of P1.
  1. The innocuous small blue candle, when it appears out of the blue, can be startling and unexpected, causing alarm.
  1. The blue candle provides motivation for the bulls to take up long positions while also causing unease amongst the bears.
  1. The expectation is that a sense of fear among bears will spread quickly, which should give bulls an added boost. This typically drives prices even higher. Therefore, it’s wise to consider taking a long position with the stock.

The following are the trade setup for bullish harami:

  1. We must take advantage of the bullish harami formation and hold our positions for long-term gain.
  1. Those with an appetite for risk may consider entering into a long trade when the P2 candle is closing.
  1. Risk takers should check certain criteria to verify if the P1 and P2 shape a bullish harami pattern.
  1. To ensure the highest level of performance, it is important that the start of P2 be higher than the end of P1.
  1. At 3:20 PM, the market price should be lower than it was at P1’s opening.
  1. If both conditions are met, it is possible to confirm that P1 and P2 have created a bullish harami.
  1. The risk-averse should wait for the day after P2 to close, ensuring it forms a blue candle before initiating a long trade.
  1. The stoploss for the trade will be the lowest point in the pattern.

Once a trade has begun, the trader must wait to see if their order will be fulfilled or their stop loss activated.

This chart shows a candlestick pattern that is not a bullish harami. Even though the encircled candles look like this particular formation, the nearly flat prior trend prevents us from defining it as such.

In this case, a bullish harami pattern had emerged, but the stop loss triggered and caused a deficit.

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