The Bullish Harami pattern is made up of two candlesticks and suggests a possible bullish reversal in the market. However, it’s important not to trade the Bullish Harami on its own. Instead, it should be considered alongside other factors to confirm the pattern.
In this article, we will explore:
1. What is a Bullish Harami Pattern?
2. How to Identify a Bullish Harami on a Trading Chart
3. How to Trade the Bullish Harami Candlestick Pattern
What is a Bullish Harami Pattern?
The Bullish Harami is a reversal pattern that typically appears at the bottom of a downtrend, signaling a possible shift to an upward trend. It consists of two candles:
• The first candle is bearish with a large body, reflecting the existing downtrend.
• The second candle is bullish with a small body that is entirely within the body of the previous candle.
This small bullish candle opens near the middle of the previous bearish candle, indicating a potential change in momentum.
The opposite of the Bullish Harami is the Bearish Harami, which is found at the top of an uptrend and suggests a possible downward reversal.
Bullish Harami Candlestick Explained
Sometimes, traders look for the second candle in the Bullish Harami pattern to be a Doji. A Doji shows market indecision and can strengthen the reversal signal when it appears at the bottom of a downtrend. The color of the Doji (whether black, green, or red) is not as important as its presence. When a Doji forms within the Bullish Harami, it’s called a Bullish Harami Cross.
The Bullish Harami Cross can offer an attractive risk-to-reward potential because the bullish move is just beginning, allowing traders to enter the market early.
How to Identify a Bullish Harami on Trading Charts
The Bullish Harami pattern may look slightly different on a stock chart compared to a 24-hour forex market, but the same basic steps apply when identifying the pattern.
Bullish Harami Checklist:
1. Identify an existing downtrend: Start by spotting a clear downward trend in the market.
2. Look for signs of slowing or reversing momentum: Use indicators like stochastic oscillators, bullish moving average crossovers, or the formation of bullish candles to confirm that the momentum is shifting.
3. Check the size of the small green candle: Ensure that the body of the small green candle is no more than 25% of the previous bearish candle’s body. In stock charts, you’ll often see a gap, with the green candle appearing midway up the previous candle. In forex charts, the candles usually appear side by side due to the market’s continuous nature.
4. Confirm the entire bullish candle is within the previous bearish candle: The small green candle should be completely enclosed within the body of the previous bearish candle.
5. Look for confluence with other indicators or support levels: Use additional indicators or identify key support levels to strengthen the signal.
Formation of the Bullish Harami Pattern in the Forex Market
The forex market operates 24 hours a day, five days a week, meaning 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 Bullish Harami pattern in forex often looks like this:
The small green candle opens at the same level where the previous bearish candle closed, a common occurrence in forex.
Formation of the Bullish Harami Pattern on Stock Charts
Stocks, on the other hand, trade during specified hours and are known to experience gaps between the closing price and the next day’s opening price. These gaps can occur for various reasons, such as:
• Company news released after market hours
• Economic data related to the country or sector
• Rumored takeovers or mergers
• General market sentiment
As a result, the traditional Harami pattern may appear with noticeable gaps between candles, as seen in the stock market example below:
In stock charts, like the one for Societe Generale (GLE FP) on the CAC 40, you’ll often notice wide gaps between candles, a common feature in stock trading.
How to Trade the Bullish Harami Candlestick Pattern?
Traders can use the Bullish Harami pattern by following a simple five-step checklist, as outlined earlier. Let’s take a look at how this works using the GBP/USD chart as an example:
1. Identify a clear downtrend: Start by confirming that the market is in a downtrend.
2. Spot additional signals: Before the Bullish Harami pattern forms, a Bullish Hammer may appear, giving the first hint that the market might be about to reverse.
3. Check the size of the bullish candle: Ensure that the bullish candle is no more than 25% of the length of the previous bearish candle.
4. Confirm the placement of the bullish candle: The bullish candle should open and close within the body of the previous bearish candle.
5. Use the RSI for confirmation: The RSI (Relative Strength Index) might show that the market is oversold, suggesting that downward momentum is slowing. However, traders should wait for the RSI to cross back above the 30 line for stronger confirmation.
Once these conditions are met, traders can proceed as follows:
• Place stop-loss orders: Stops can be set just below the new low, 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 Bullish Harami pattern.
• Set target levels: Since the Bullish Harami appears at the start of a potential uptrend, traders can set multiple target levels to maximize profits. These targets can be placed at recent support and resistance levels, allowing traders to ride out a possible extended uptrend.
How Reliable is the Bullish Harami?
The reliability of the Bullish Harami pattern, like other forex candlestick patterns, depends on several factors such as the surrounding price action, the use of indicators, where the pattern appears in the trend, and key support levels. Below are some advantages and limitations of the Bullish Harami pattern:
Advantages:
• Attractive entry levels: The pattern typically appears at the start of a potential uptrend, offering a good opportunity to enter the market.
• Favorable risk-to-reward ratio: Compared to the Bullish Engulfing pattern, the Bullish Harami can offer a more attractive risk-to-reward ratio.
• Easy to identify: This pattern is relatively simple for novice traders to spot.
Limitations:
• Should not be used alone: The pattern should not be traded based on its formation alone; it requires confirmation from other factors.
• Position in the trend is crucial: The Bullish Harami is only reliable if it appears at the bottom of a downtrend. If it occurs elsewhere, it might not signal a true reversal.
• Requires additional analysis: To effectively trade the Bullish Harami, traders need to understand and use supporting technical analysis or indicators, such as Stochastics or RSI.
