Bullish Harami

DEFINITION of 'Bullish Harami'

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.

BREAKING DOWN 'Bullish Harami'

Technical analysis is a type of investment analysis that focuses solely on price. Technical analysts believe that patterns can be found in the movement of price over time and that these patterns are fairly predictable. Pattern recognition and identification is at the heart of technical analysis, and one of the most common bullish candlestick chart patterns is the bullish harami. If an outline is drawn around the pattern, it resembles a pregnant woman, which is why the pattern is named after the word "harami," an old Japanese word meaning "pregnant." Traders using the bullish harami are looking for a confirmation of a reversal.

Bullish Harami Example

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.