The Bearish Harami pattern is made up of two candlesticks and suggests a possible bearish reversal in the market. However, it’s important not to trade the Bearish Harami on its own. Instead, it should be considered along with other factors for confirmation.
In this article, we will cover:
1. What is a Bearish Harami Pattern?
2. How to Identify a Bearish Harami on a Trading Chart
3. How to Trade the Bearish Harami Candlestick Pattern
What is a Bearish Harami Pattern?
The Bearish Harami is a reversal pattern that typically appears at the top of an uptrend, signaling a possible shift to a downward trend. The pattern consists of two candles:
• The first candle is bullish with a large body, reflecting the ongoing uptrend.
• The second candle is bearish with a small body that is entirely within the body of the previous candle.
This small bearish candle opens near the middle of the previous bullish candle, indicating a potential change in momentum.
The opposite of the Bearish Harami is the Bullish Harami, which appears at the bottom of a downtrend and suggests a possible upward reversal.
How to Identify a Bearish Harami on Trading Charts
Bearish Harami Checklist:
1. Identify an existing uptrend: Start by confirming that the market is in an uptrend.
2. Look for signs of slowing or reversing momentum: Use indicators like stochastic oscillators, bearish moving average crossovers, or the formation of bearish candles to confirm that the momentum is shifting.
3. Check the size of the small red candle: Ensure that the body of the small red candle is no more than 25% of the length of the previous bullish candle. In stock charts, you’ll often see a gap down, with the red candle appearing midway down the previous candle. In forex charts, the candles usually open at the same level as the prior candle’s close or very close to it, so gaps are less common.
4. Confirm the placement of the bearish candle: The small red candle should be completely enclosed within the body of the previous bullish candle.
5. Look for confluence with other indicators or resistance levels: Use additional indicators or identify key resistance levels to strengthen the signal.
It’s important to note that the Bearish Harami candlestick pattern may look different on a stock chart compared to a 24-hour forex market. Let’s explore how the pattern forms in each:
Formation of the Bearish Harami Pattern in the Forex Market:
The forex market operates 24 hours a day, five days a week, meaning that when one candle closes, the next one often opens at nearly the same price level. This is usually the case in normal market conditions but can change during periods of high volatility. The Bearish Harami pattern in forex often looks like this:
The small red candle opens close to or at the level where the previous bullish candle closed, which is typical in the forex market.
Formation of the Bearish Harami Pattern in Stocks
Stocks, on the other hand, have specific trading hours and often experience gaps between the closing price and the next day’s opening price. These gaps can occur for various reasons, such as:
• Negative company news released after the market closes
• Worse-than-expected economic data for the country or sector
• Regulatory changes that may negatively impact future earnings
• General negative market sentiment
As a result, the traditional Harami pattern may appear with noticeable gaps between candles, as seen in the example for FTSE 100 stock, Lloyds Banking Group PLC:
In stock charts, like the one for Lloyds PLC, you’ll often notice wide gaps between candles, which is common in stock trading.
How to Trade the Bearish Harami Candlestick Pattern
Traders can use the Bearish Harami pattern by following the 5-step checklist mentioned earlier. Let’s apply this checklist to the USD/SGD chart:
1. Identify a clear uptrend: First, confirm that the market is in an uptrend.
2. Use RSI for confirmation: The RSI (Relative Strength Index) indicates that the market is overbought, suggesting that the upward momentum might be weakening. However, traders should wait for the RSI to cross back below the 70 line for stronger confirmation.
3. Check the size of the bearish candle: Ensure that the bearish candle is no more than 25% of the length of the previous bullish candle.
4. Confirm the placement of the bearish candle: The bearish candle should open and close within the body of the previous bullish candle.
5. Consider the context: This Bearish Harami appears at a new high, so it’s important to note that the market has previously turned lower from even lower highs. The subsequent price action also supports the new downward momentum indicated by the Bearish Harami.
Once these conditions are met, traders can proceed as follows:
• Place stop-loss orders: Stops can be placed above the new high to manage risk in case the market doesn’t reverse as expected.
• Enter the trade: Traders can enter the market at the open of the candle following the completion of the Bearish Harami pattern.
• Set target levels: Since the Bearish Harami appears at the start of a potential downtrend, traders can set multiple target levels to maximize profits. These targets can be placed at recent support levels, allowing traders to ride out a possible extended downtrend.
The validity of the Bearish Harami, like all other candlestick patterns, depends on the price action around it, indicators, where it appears in the trend, and key levels of resistance. Below are some of the advantages and limitations of this pattern.
| Advantages | Limitations |
|---|---|
| Attractive entry levels as the pattern appears at the start of a potential downtrend | Should not be traded based on its formation alone |
| Can offer a more attractive risk to reward ratio when compared to the Bearish Engulfing pattern | Where the pattern occurs within the trend is crucial. Must appear at the top of an uptrend |
| Easy to identify for novice traders | Requires understanding of supporting technical analysis or indicators.Popular: Stochastics and RSI |
