What Is a Bearish Harami?
A bearish harami is a two bar Japanese candlestick pattern that suggests prices may soon reverse to the downside. The pattern consists of a long white candle followed by a small black candle. The opening and closing prices of the second candle must be contained within the body of the first candle. An uptrend precedes the formation of a bearish harami.
This can be contrasted with a bullish harami.
- A bearish harami is a candlestick chart indicator for reversal in a bull price movement.
- It is generally indicated by a small decrease in price (signified by a black candle) that can be contained within the given equity's upward price movement (signified by white candles) from the past day or two.
- Traders can use technical indicators, such as the relative strength index (RSI) and the stochastic oscillator with a bearish harami to increase the chance of a successful trade.
Bearish Harami Explained
The size of the second candle determines the pattern's potency; the smaller it is, the higher the chance there is of a reversal occurring. The opposite pattern to a bearish harami is a bullish harami, which is preceded by a downtrend and suggests prices may reverse to the upside.
A bearish harami received its name because it resembles the appearance of a pregnant woman. “Harami” is the Japanese word for pregnant.
Traders typically combine other technical indicators with a bearish harami to increase the effectiveness of its use as a trading signal. For, example, a trader may use a 200-day moving average to ensure the market is in a long-term downtrend and take a short position when a bearish harami forms during a retracement.
Trading a Bearish Harami
Price Action: A short position could be taken when price breaks below the second candle (harami candle) in the pattern. This can be done by placing a stop-limit order slightly below the harami candle's low, which is ideal for traders who don't have time to watch the market, or by placing a market order at the time of the break. Depending on the trader's appetite for risk, a stop-loss order could be placed above either the high of the harami candle or above the long white candle. Areas of support and resistance might be used to set a profit target.
Indicators: Traders can use technical indicators, such as the relative strength index (RSI) and the stochastic oscillator with a bearish harami to increase the chance of a successful trade. A short position could be opened when the pattern forms and the indicator gives an overbought signal. Because it is best to trade a bearish harami in an overall downtrend, it may be beneficial to make the indicator's setting more sensitive so that it registers an overbought reading during a retracement in that trend. Profits could be taken when the indicator moves back into oversold territory. Traders who want a larger profit target could use the same indicator on a larger timeframe. For example, if the daily chart was used to take the trade, the position could be closed when the indicator gives an oversold reading on the weekly timeframe.