How to Trade Harami Candlestick pattern with Chart Examples | TheForex7

THE HARAMI PATTERN

Spinning tops (that is, small real bodies) are components in certain formations. The harami is one of these formations (the star, examined in Chapter 3, is another). The harami pattern (see Exhibit 4.1) is a small real body that is contained within what the Japanese call "an unusually long black or white real body." "Harami" is an old Japanese word for pregnant. The Japanese nickname for the long candle is the "mother" candle and the small candle is the "baby" or "fetus." The second candle of the harami can be white or black. If, for example, both the first and second candles of the harami are white, it would be expressed as "white-white harami."

Exhibit 4.1. Harami

The Japanese will say that with a harami the market is "losing its breath." The bearish harami displays a disparity about the market's health. Specifically, after a bull move, the long white real body's vitality is followed by the small real body's uncertainty. Additionally, the small real body opening and closing within the prior open-close range is another indication that the bulls' upward drive has weakened. Thus, a trend reversal is possible. During a bear move, the selling force reflected by a long black real body is followed by the second day's vacillation. This could portend a trend reversal since the second day's small real body is an alert that the bears' power has diminished.

The combination of candle lines in the harami pattern, with its first tall real body followed by a small real body, is the reverse of the engulfing pattern. In the engulfing pattern, a lengthy real body engulfs the preceding small real body.

Another difference between the harami and engulfing patterns is that for the two candles of the engulfing pattern, the colour of the real bodies should be opposite. This is not necessary for the harami. You should find, however, that in most instances, the real bodies in the harami are oppositely coloured.

The harami formation is comparable to the Western inside day. For a Western inside day (see Exhibit 4.2), the entire range of the second session has to be within the entire range of the first session. This is not necessary for harami. For harami all that is required is that the second real body be within the first real body, even if the shadow of the second day is above or below the prior day's high and low. Notice the bearish harami on the left of Exhibit 4.1. On the second session the upper shadow moved over the prior white real body. This is still a harami because the second session's real body was contained within the first real body.

Exhibit 4.2. Inside Day

Harami Cross

The regular harami has a tall real body followed by a small real body. Yet, there are no rules as to what is considered a "small" candle. This, like many other charting techniques, is subjective. As the general principle, the more diminutive the second real body, the more potent the pattern. This is usually true because the smaller the real body, the greater the ambivalence and the more likely a trend reversal. In the extremes, as the real body becomes smaller as the spread between the open and close narrows, a doji is formed. A doji preceded by a long black real body during a decline (or a tall white real body during a rally) is a distinctive type of harami referred to as a harami cross (Exhibit 4.3).

Exhibit 4.3. Harami Cross

The harami cross, because it contains a doji, is viewed as a more potent reversal signal than the regular harami pattern by the Japanese. The harami cross is sometimes referred to as the petrifying pattern. My best guess as to why it has that nickname is that the preceding trend has been frozen or petrified in preparation for a reverse move. A harami cross occurring after a very long white candle is a pattern a long trader ignores at his or her own peril. Harami cross can also call bottoms, but they seem more effective at tops.

Exhibit 4.4 shows a brisk rally that started October 26. The third white candle of this rally on October 31 pushed the index over the October 23-24 bearish engulfing pattern's resistance (at B). However, whatever cause for optimism the bulls had on the 31st was short-lived as a harami pattern was completed with the November 1 candle. That candle's real body was so small that it could be considered a harami cross. The series of spinning tops after the harami reinforced that the trend had changed from up to neutral. The long black candle on November 8 completed a tower top (see later in this chapter).

In Exhibit 4.5 a price drop that began with the hanging man found a floor with the harami of November 4 and 5. The second real body of this harami was so small that I viewed it as a doji.

Exhibit 4.4. S&P – Daily (Harami)

Exhibit 4.5. Amazon-Daily (Harami Cross)

As such, this is a harami cross. What was especially significant about the emergence of this pattern was that it helped clearly confirm a defined support near $61 (shown by the horizontal support line). If this were a bar chart, we would have the same support based on the action from early to late September. Although we're using a candle chart, we can and should use traditional bar chart support or resistance areas. Thus, there was an Eastern signal (harami) confirming a traditional Western signal (support line).

There was an earlier harami cross pattern on September 29 and 30. With this harami the short-term trend changed up to lateral. This pattern highlights an important point—one that was addressed in the introduction to Chapter 3: When a trend changes it doesn't necessarily mean that prices will go from, say, up to down. In both harami in this exhibit the former uptrend did change after the appearance of the harami. In the November harami, the trend shifted from down to up and in the September harami from up to neutral. As such, both harami correctly forecasted a change of trend.

We are all detectives in the market as we pick up the small visual clues the market continually sends out. As these clues unravel, we may have to adjust our market stance. Exhibit 4.6 is an example of this. On April 19 this stock pushed above resistance with an extended white candle. With this bullish breakout, the signs pointed north. The next day, the texture of the market had changed with the harami. While this harami doesn't immediately convert the short-term trend from up to down, it was a visual alarm. As such, longs can be scaled back, protective stops moved higher, etc. The doji after the harami (on April 24) helped reinforce that the trend had moved from up to more neutral since the doji represents a time where the bulls and bears are in equilibrium. The descent from this harami continued until a bullish engulfing pattern (the first session of this pattern was a hammer). The rally from the bullish engulfing pattern got clogged on May 9 at the doji. The candle lines marked 1 and 2 were also harami patterns, with line 2, since it was a doji, forming a harami cross.

Exhibit 4.7 is an example of the ease with which we can meld candle charting and Western charting tools. A rising resistance line connects the highs of March 15 and April 12. As will be

Exhibit 4.6. Pharmacia-Daily (Harami)

Exhibit 4.7. Chris-Craft Industries-Daily (Harami)

detailed in Part 2 of this book (where the focus is on Western charting tools), a rising resistance line can be an area of supply. When price intersected this line on May 13, we received visual confirmation that supply was overcoming demand with that candle's bearish upper shadow and then completing a harami. Observe also how the prior price peak on April 12 and 13 was also a harami. Hammers at 1 and 2 gave signs of stabilization.