A Bullish Harami is a candlestick pattern that is formed when a large candle is immediately followed by a smaller candle, with the smaller candle's body being found within the overall range of the larger candle's body. When referring to candle colors, the Bullish Harami consists of a downtrend of red (or black) candles, with the final candle that engulfs a small green (or white) candle, which indicates a reversal of the downtrend.
The word "Harami" is Japanese for "pregnant." This isn't coincidence, as when an outline is drawn for this pattern, it resembles a pregnant woman's shape. The last red (or black) candle represents the mother, while the smaller green (or white) candle represents the baby.
Bullish Harami Formations
The Bullish Harami pattern consists of two candlesticks, in which the first trading session's candle (red or black) engulfs the candle (green or white) from the following trading session. The first candle should be either a standard or long red (or black) candle. The tops or bottoms of the two candles may be the same, but whatever the case, the green (or white) candle body should always be smaller than (and engulfed by) the previous red (or black) candle body. Confirmation of the pattern can be established on the following day, once the price has risen above the half-way point of the last red (or black) candle.
The Bullish Harami pattern is an indication of inconsistency in the market’s health. The market is in a downtrend and an overall bearish sentiment, which leads to heavy sell pressure as indicated by the red body candles. However, the next trading session the price opens higher or at the close level of the prior session and short traders start to cover their shorts, causing the price to rise even more. Late-comers attempt to short the downtrend they may have missed out on, and profit takers from scalp trades slow the rise in price. As a result, a small green candle body is formed. This may indicate a reversal in the downtrend as it indicates that bearish sentiment and momentum may be changing.
Trading the Bullish Harami Pattern
A few key points to recognize the Bullish Harmani pattern are:
- The market has established a prevailing downtrend
- A red candle body is observed in the first trading session
- The green candle body that occurs in the second trading session is completely engulfed by the body of the first
- Next day price rises above halfway point on red engulfing candle body
To confirm the overall pattern, the price rises above the midpoint of the last red candle body. For confirmation, the price should cross above this level.
The stop-loss level should be established at the lower of the last two lows.
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Labels: Charts 101, Technical Analysis
