Richard has more than two decades of experience in the financial markets and has had his writing appear on CNBC, NASDAQ, Economy Watch, Motley Fool, and Wired Magazine
Harami candlestick patterns indicate a trend reversal in the underlying market price of an asset. As a basic candlestick chart pattern, traders of all levels can learn about the way the formation is structured, in addition to the various interpretations involved when trading live market trading positions are established. The Harami Japanese candlestick pattern can occur in both bullish and bearish markets, which means that the formation can be useful in any environment. A bullish Harami pattern indicates an upward price reversal, whereas the bearish Harami pattern indicates a downward price reversal may be possible.
Broadly speaking, Harami patterns consist of two candlestick periods, the first of which occurs with a decisive candlestick formation (characterized by a long candle body). This candle is followed by an opposing price period, where sentiment is centered in the opposite direction. In other words, a bullish Harami consists of a long red candle, followed by a smaller (inside) green candle while a bearish Harami consists of a long green candle, followed by a smaller (inside) red candle.
Market situations that tend to lend themselves well to trades using Harami patterns are often found at the end of a significant trending move that may have created an overbought or oversold condition for the asset. As the prior trending move reaches its completion point, the formation of a Harami pattern can be used as the basis for live market positions.
In this chart example, Japanese candlestick traders were alerted to the possibility of a downside reversal in price activity, after the clear formation of a Harami pattern occurred near the end of a previous uptrend. For expert traders, this would be a strong signal to sell the asset through the initiation of short positions.
As we can see, prices head lower almost immediately after the formation of the Harami candlestick pattern. This means traders could have established short positions in the asset, with stop-loss orders placed above the high of the first candlestick in the Harami pattern. Under this scenario, traders could have captured significant gains while experiencing little to no drawdown on short positions. Since these patterns occur in relatively high frequencies, traders can implement Harami trading strategies as part of a consistent repeatable strategy to capture profits.
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