Bearish Harami Candlestick pattern: Tutorial for beginners

Candlestick patterns are important and essential tool for traders and investors trying to read and predict the market behavior. Bearish Harami pattern is one such candlestick pattern that signals potential reversal in the ongoing uptrend. In this comprehensive beginner friendly post I am going to break down Bearish Harami candlestick pattern by answering questions like- What is Bearish Harami candlestick pattern? How to identify it? When and How to use it? And How this pattern can help you make informed trading decisions.

What is a Bearish Harami Candlestick Pattern?

The word  "Harami" originates from Japanese which means pregnant and denotes the visual similarities between the two. Just like a pregnant women carries a small life inside her womb, a bearish (or bullish) harami pattern looks like a large candlestick containing a small candlestick within its body.

A bearish harami pattern, thus is characterized by a long green (or white) candlestick at the end of an uptrend followed by a small red (or black) candle that lies within the body of the first candle. So, a bearish harami candlestick pattern is a two candle reversal pattern that signals a potential reversal after an uptrend.

How to identify a Bearish Harami Candlestick Pattern?

To correctly identify a bearish harami pattern , ensure following conditions are met:

1. Trend preceding the pattern: There must be an existing uptrend before the pattern forms. Pattern forming anywhere else in chart is not valid.
2. A long Bullish Candle: A long Bullish candle (green or white candle) consistent with the prevailing trend forms often with low to moderate volume.
3. A small  Bearish candle: The second candle of the pattern is a small red candle which lies within the body of the previous candle. Formation of  this candle is often associated with higher volume that points towards a strengthened or a valid signal

What is Psychology behind Bearish Harami Candlestick Pattern?

The first candle of the pattern, the long bullish candle suggests the bulls are in control cementing the prevailing uptrend. This first candle often forms near a resistance level and with lower volume than average volume.

The second candle opens below the previous candle suggesting the bears are taking over. The sellers continue to sell throughout the day forming a bearish, red candle. However, the sellers are not in full control yet and are not able to push price below the previous close thus making a small red candle within the body of first candle.

This second handle overall marks a period of indecisiveness among traders with a moderate upper hand of sellers or bears. Thus, the pattern has a bearish sentiments attached to it.

When and How to use Bearish Harami Candlestick Pattern?

A Bearish Harami pattern should never be traded alone and other indicators, chart patterns and resistance and support should be factored in before trading this pattern.

Let's go through a step-by-step approach to using this pattern to understand the concept in lucid manner.

1. Identify the pattern: Identify the pattern on the stock chart or scan for the pattern in your favorite scanner as described in the previous section of this post.
2. Confirm the validity of pattern: A valid Bearish Harami Pattern occurs after an uptrend. Avoid using this pattern in sideways or choppy market conditions.
3. Look for additional confirmations- Look for additional confirmations before entering a trend. Additional confirmations can be pattern forming near a resistance level. RSI in overbought region, that is above 70 can be another confirmation that you can look for. A RSI or MACD divergence forming near this pattern can be yet another confirmatory signal to look for. Other indicators that can be used are Stochastic oscillator and Bollinger bands.
4. Take Entry- A Bearish Harami Pattern can be traded in two ways. If you already have long position, you consider liquidating your position after formation of a valid Bearish Harami Candlestick Pattern. Other way to trade this pattern is to take a short position once this pattern forms. A short entry after this pattern is taken once the price crosses below the low of second candle.
5. Apply Stop-loss- A stop-loss in this pattern is put above the high of first candle.

Look at the chart below to understand how to use bearish harami pattern for trading.

In this daily chart of Interglobe Aviation, notice that the stock was in an uptrend initially. This was followed by formation of a bearish harami pattern as marked in the chart above. Also notice that the RSI is in overbought region when the candlestick pattern forms. This point can be used to liquidate a long position or take a fresh short entry.

Here is another chart to demonstrate the trading method with bearish harami pattern.

Mastering candlestick patterns like the Bearish Harami Pattern can enhance your ability to read the market sentiments and aids in making informed trading entries and exits. Bearish Harami pattern helps in recognizing potential reversal. Though the pattern itself is not enough but once combined with other factors like support resistance zones, RSI, MACD and volume analysis, the pattern can become a valuable toolkit for the traders. As you learn to use the pattern, do practice in historical charts before trading using this pattern in real market scenarios.

Happy Trading!!