Mastering Forex Trading with Harami Candlestick Patterns

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The term ‘Harami’ originates from Japanese, meaning “pregnant woman”. The Harami candlestick pattern comprises of two candles and often signals a market trend reversal.

Understanding Bullish Harami

In the context of the Harami pattern, the first candle (Mother candle) is a large-bodied candle in line with the prevailing trend, followed by a small-bodied candle. It’s crucial to note that the second candle lies within the range of the first candle. The anatomy of a typical Bullish Harami is as follows:

• The pattern appears at the bottom of a downtrend.
• The first candle (Mother candle) is a bearish candle with a large body, followed by a smaller bullish candle nestled within the body of the Mother candle (resembling an Inside Bar).
• Signals a trend reversal, indicating an uptrend.

Understanding Bearish Harami

In contrast, the Bearish Harami pattern emerges at the peak of an uptrend:

• The first candle (Mother candle) is a bullish candle with a large body, succeeded by a small bearish candle contained within the body of the Mother candle.
• Signals a trend reversal, indicating a downtrend.

Identifying Bullish Harami

To identify a Bullish Harami:

• The current market trend is downward.
• Momentum indicators are slowing down or signaling a reversal (e.g., oversold stochastic oscillators, crossing of moving averages).
• The length of the second candle’s body (bullish candle) is less than 25% compared to the length of the Mother candle’s body.
• The entire bullish candle is encompassed within the bearish candle preceding it.
• Combine with other indicators or support levels for confirmation.

Identifying Bearish Harami

To identify a Bearish Harami:

• The current market trend is upward.
• Momentum indicators are slowing down or signaling a reversal (e.g., overbought stochastic oscillators, crossing of moving averages).
• The length of the second candle’s body (bearish candle) is less than 25% compared to the length of the Mother candle’s body.
• The entire bearish candle is engulfed within the bullish candle preceding it.
• Combine with other indicators or support levels for confirmation.

Trading Guide with Bullish Harami

Analyzing the GBP/USD chart below, noteworthy observations include:

• A clear downtrend is evident.
• A Bullish Hammer appears prior to the Bullish Harami, providing the initial hint of a potential trend reversal.
• The length of the bullish candle is less than 25% compared to the preceding candle.
• The bullish candle opens and closes within the range of the preceding candle.
• RSI indicates oversold conditions, with the downtrend momentum nearing exhaustion. However, traders should await RSI crossing above 30 for confirmation.
• Stop-loss points can be placed below the new low, and traders may enter the trade after the Bullish Harami pattern completes. As the Bullish Harami emerges at the onset of a potential uptrend, traders can set profit targets at support and resistance levels.

Trading Guide with Bearish Harami

Analyzing the USD/SGD chart below, notable observations include:

• A clear uptrend is evident.
• RSI indicates overbought conditions, with the uptrend momentum waning. However, traders should await RSI crossing above 70 for confirmation.
• The length of the bearish candle is less than 25% compared to the preceding candle.
• The entire bearish candle is engulfed within the preceding bullish candle.
• Bearish Harami appears at the peak. Traders should note the currency pair has previously declined from its peak, and the Bearish Harami confirms the market’s downtrend.
• Stop-loss points can be placed above the new high, and traders may enter the trade after the Bearish Harami pattern completes. As the Bearish Harami emerges at the onset of a potential downtrend, traders can set profit targets within the downtrend.

Advantages of Harami:

• Easy to identify.
• Exploits market reversal opportunities with high risk/reward ratios.
• Widely used in forex trading.

Limitations of Harami:

• Should not be traded based solely on the Harami candlestick pattern.
• Confirmation signals are necessary before entering trades.