Harami Candlestick Pattern
I would like to cover some secondary candlestick patterns that signal a reversal may be at hand. These are not as powerful as the formations we went over in our Candlestick Charts Reversal article; however, they are important nonetheless. This article will focus on the Harami.
When the harami pattern appears, it depicts a condition in which the market is losing its steam in the prevailing direction. The harami consists of a small real body that is contained within the preceding large candles' real body. The preceding candle tends to be very large in relation to the other candles around it.
What does a harami tell us about the condition of the market? During a bullish move, the harami tells us that strength in the previous candle is dissipating. This could be for a couple of reasons: 1) the bulls who have made gains in the stock may be taking a breather to either accumulate more shares or sell out of their existing positions. While the bias of the harami pattern indicates a reversal, I have noticed that the appearance of a harami formation in day trading can actually be quite bullish if the highs of the bar prior to the harami are broken to the upside. This would indicate that there was, in fact, buying going on within the harami bar.
The harami cross is a more powerful version of the harami. It is characterized by having a very small real body almost to the point of being a doji. The smaller the real body, the better for this formation. The lack of a real body after a strong move in the prior candle tells us with more certainty that the previous trend is coming to an end and that a reversal may be at hand. The high or low of a harami cross setup tends to provide resistance or support for any further price moves. Let's take a look at a simple example that a day trader could have profited handsomely off of.
As you can see, this was a perfect harami cross setup but I also want to point your attention to the fact that we saw other candlestick formations confirm what the harami cross was telling us. The double top that came in the form of a bearish engulfing candlestick was gave us that added confirmation that we really did see a top of some sort. Again, a triple top came in the form of a shooting star which also led us to believe that we could be in store for yet another pullback. This is the power of candlesticks and using various methods to confirm each other.
That should just about do it on the harami and harami cross, it is a pretty straight forward candlestick pattern. Remember, the harami is a secondary candlestick charting formation in terms of reliability and should be used accordingly.