A bullish harami is a candlestick chart pattern in which a large candlestick is followed by a smaller candlestick whose body is located within the vertical range of the larger body. The bullish harami is a downtrend or bearish candlestick (red) engulfing a small bullish candlestick (green), giving a sign of a reversal of the downward trend. Since the bullish harami indicates the bearish trend may be reversing, it may be a good time to enter into a long position.
The bullish harami is a long candlestick followed by a small body that is completely inside the range of the previous body. The first body represents the beginning of the price movement or harami formation. The small body marks a change or reversal in the opposite direction of the previous candlestick and represents the confirmation of the bullish harami, which can be in several formations.
Bullish haramis come after a decline in price. A smaller body on the second candlestick indicates a higher probability for a reversal. The smallest candlestick is referred to as a doji. If the price is going in one direction, stops and then reverses, it represents an opportunity for the trader to make a profit by buying on the reversal. The bullish harami confirms this reversal.
In April 2000, Micromuse stock declined to the mid-30s and then traded in a range between $35 and $50 from mid-April to the beginning of June. Traders know that the price can do one of two things when it breaks out of this range: it can go up, or it can go down. As the price finds a range, the breakout pattern can help to determine the direction of the price. In late May, the price dropped below the range, and was followed by a gap up and a bullish harami formation on a daily candlestick chart. In other words, the first day fully engulfed the second day. Traders have a long green or bullish candlestick followed by a small doji candlestick. The likelihood of a reversal was strong. Over the next two weeks, the price surged to $75, confirming the pattern.