Earlier we covered a few reversal candlestick patterns, like, the Morning Star, Bullish engulfing and Hammer patterns. Today we are going to discuss another bullish reversal candlestick pattern- the Bullish Harami pattern.
Bullish Harami pattern is a frequent pattern observed on charts across all timeframes and many market conditions, however, it is considered less powerful than other bullish patterns in predicting a reversal when used in isolation. That said, once combined with market structure and confirmed with other tools, the Harami pattern can prove to be powerful pattern to trade reversals.
Let's deconstruct this pattern in detail.
What is the Bullish Harami pattern?
A Bullish Harami pattern is a two-candle candlestick pattern that signals a pause in the established downtrend and hints that a bullish reversal might be on the horizon.
The word "Harami" is a Japanese word that means pregnant.
The term describes the pattern's morphology, where a big candle contains a small candle in its body, just like a pregnant lady carries her baby inside her. More of it in the next section where we will discuss the identification of this pattern.
How to identify the Bullish Harami pattern?
A Bullish Harami pattern is a two candle pattern.
The first candle of the pattern is a long red (or black) candle that signifies continuation of a downtrend.
The next candle starts with a gap up opening. This second candle has small green body which is completely contained within the body of the first candle.
Though some purist analysts argue that the entire range of the second candle (the body and wicks) should be inside the first candle but in modern trading, it is generally accepted if just the actual body of second candle is contained within the body of first candle.
Let's understand this with the help of a picture.
What does the Bullish Harami pattern indicate?
Unlike other bullish reversal patterns like, Morning Star and Three White Soldiers where powerful bullish intent is reflected through the candlestick pattern, in Bullish Harami that bullish intent is somewhat subdued.
The pattern shows a pause in the bearish momentum, which might be because of seller exhaustion or short covering. The pattern indicates a state of indecision between buyers and sellers, with a slight edge to the buyers.
The first candle of the pattern, a long red candle, suggests the bears are in total control. However, a gap up opening of second candle and inability of sellers to take this second candle further below suggests the sellers are exhausted and bulls are stepping in, albeit with caution.
Types of Bullish Harami pattern
Though the standard Bullish Harami pattern as discussed above is most common, a variation exists.
Standard Bullish Harami- This is the classic pattern as discussed above. The first candle is a long red candle and the second candle is a small bullish candle with its body completely contained within the body of first candle.
The Bullish Harami cross- In this variation, the second candle is a Doji- where open and close prices are virtually identical. The Bullish Harami cross is considered more potent than its standard counterpart in signalling a bullish reversal.
The two types of the Bullish Harami patterns are shown in the image below.
Difference between Bullish Harami and Inside Bar
Many beginners confuse the Bullish Harami with Inside Bar. While they look similar and often overlap, their definition, origin and context in which the two are found is different.
In a Bullish Harami pattern, the second candle's body should lie within the body of first candle but in Inside bar, the entire range of the second candle should be within the body of second candle.
The Bullish Harami candle is a reversal signal that is often found at the end of a downtrend while the Inside Bar is a neutral pattern and can be found anywhere in a trend.
Bullish Harami Vs Bullish engulfing pattern
These are the two most common two-candle bullish reversal patterns, but they tell different stories.
In a Bullish Engulfing pattern, the second candle is huge and completely 'engulfs' the previous red candle, but in a Bullish Harami pattern, the second candle lies within the body of the first red candle.
A Bullish engulfing pattern is a violent bullish reversal sign where buyers have completely overwhelmed the sellers. However, a Bullish Harami pattern is much like a pause in the ensuing downtrend where buyers and sellers are in a state of indecision.
A Bullish Engulfing pattern is considered a more powerful reversal signal than a Harami pattern but the Harami pattern offers a better risk reward ratio because the stop-loss is tighter.
Confirmation of Bullish Harami pattern
An extensive backtesting done by renowned market analyst Thoma Bulkowski suggests that the Bullish Harami pattern is successful in predicting a reversal only 53% of times when used in isolation. This statistics must be shocking to many traders who view this pattern as definite reversal signal.
Furthermore, these statistics also indicate that traders should not trade this pattern independently; a confirmation from other indicators must e taken before planning a trade based on Bullish Harami. Here is how you confirm this pattern.
Third candle confirmation- Wait for the third candle to form after the Bullish Harami pattern. It should be a bullish candle that should at least close above the high of the second candle. This confirms that the hesitation has resolved in favour of the buyers.
Support zone confirmation- A Harami forming in the middle of nowhere is invalid. To be valid, the pattern should form near a key support zone, like, a trendline support, Fibonacci key level, or a key price level.
Volume confirmation- Ideally, volume should increase on the second candle.Further, an increasing volume on the third candle (the confirmation candle) confirms the pattern to be valid.
RSI confirmation- A bullish RSI divergence when the pattern forms suggest the shift in momentum in bull's favour. Bullish RSI divergence with Bullish Harami pattern is a stronger trade setup than the reversal candlestick pattern alone.
How to trade the Bullish Harami pattern?
You should establish the context and confirm the pattern before initiating a trade based on this pattern.
Check for the preceding downtrend (context) and confirm the pattern's validity through other indicators before planning a trade.
Once context and confirmation have been ascertained, you can trade a Bullish Harami pattern in the following way.
Bullish Harami entry rule-
Ideally a buy entry should only be taken once the third candle has closed above the high of second candle. Some traders prefer an entry above the high of first candle, this further brightens the chances of a successful trade, however, the tradeoff is wider stop-loss placement.
Bullish Harami exit rule-
While trading a Bullish Harami pattern, traders usually place their stop-loss below the low of the first candle or pattern. Once the trade progresses in your favour you can trail your stop-loss or exit after a risk reward ratio of 2:1 is realised.
If the third candle closes strongly above the high of first candle, you can trail your stop-loss to ride the longer part of the uptrend.
How reliable is Bullish Harami pattern?
The Bullish Harami pattern is considered less potent than other bullish reversal patterns like, Engulfing or Morning star. Data suggests that the pattern is not very reliable when used in isolation, however, success rate improves when combined with other indicators.
In general, the pattern performs better in a bull market and on higher timeframes, like, daily and weekly.
The Bottom line-
A Bullish Harami pattern is a two candle candlestick pattern which suggests a reversal from a downtrend to an uptrend.
The first candle of the pattern is a long red candle which is in continuation of the preceding downtrend. This suggests the sellers are in control.
The second candle of the pattern is a small green candle whose body is contained inside the body of the first candle. This candle suggests the exhaustion of sellers with a period of indecision.
Prior to trading this pattern, you should confirm its validity through other signals like, third candle close, support, RSI and volume.
The pattern should be traded with caution with strict risk management rules.
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