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.
BREAKING DOWN Bearish Harami
A bearish harami received its name because it resembles the appearance of a pregnant woman. “Harami” is the Japanese word for pregnant. The size of the second candle determines the patterns 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.
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. (For further reading, see: How are Harami Cross Patterns Interpreted by Analysts and Traders?)
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. (To learn more about using multiple timeframes, see: Multiple Timeframes can Multiply Returns.)