The Harami candlestick pattern, originating from Japan, serves as a potential indicator of trend reversals and provides crypto traders with an attractive risk-to-reward trading opportunity. This formation consists of two candles, initially featuring a tall one followed by a considerably shorter one.
Harami patterns are detectable across various time frames, and once you've become adept at recognizing them, the trading process becomes relatively straightforward.
Understanding the Harami Candlestick Pattern
First, you've got a tall candle that's going with the trend. Then, right after it, you see a much shorter candle, and it's a different color – that's the signal that the trend is about to flip. Oh, and here's the key: that big first candle totally covers up the second one. That's the Harami pattern in a nutshell.
The Harami is a super popular candlestick pattern in the world of crypto trading. It's pretty easy to spot and helps traders keep their risk in check. Basically, when you use the Harami, you usually get a good risk-to-reward deal.
Fun fact: "Harami" is a Japanese word that means "pregnant." Kind of makes sense, right? Just like a pregnant lady welcoming a new baby into the world, the Harami pattern marks the start of a new trend. Some folks even say the shape of the pattern looks a bit like a pregnant lady.
There are two flavors of Harami patterns: bullish and bearish.
Exploring the Bearish Harami Candlestick Pattern
A bearish Harami pattern emerges when an uptrend reaches its peak. It unfolds with a robust, bullish green candle, followed by a smaller bearish or red candle.
Here's the crucial part: for the bearish Harami to take shape, that second candle must start lower, indicating a weakening of the prior uptrend. In the world of cryptocurrency, trading never sleeps—it's a 24/7 game. Consequently, seeing gaps up or down in crypto is quite rare.
Given this context, keep an eye on that second bearish candle as it opens and promptly heads south. The body of that first candle should entirely engulf the body of the second, sealing the Harami pattern. This signifies that prices are so feeble they can't muster the strength to return to a bullish momentum, hinting at uncertainty and a potential change in trend.
Exploring the Bullish Harami Candlestick Pattern
Now, let's flip the script to the bullish Harami, which pops up when a downtrend nears its conclusion. The first candle here is a substantial, bearish (red) one. Next, prices make a move upwards on the subsequent candle, which is notably smaller and bullish, painted green.
In cryptocurrency, you're less likely to spot a gap higher, so the bullish action typically kicks in right after the closure of the first candle. The crux of the matter is that the body of the second candle—the bullish green one—should be entirely enveloped by the body of the first red candle.
The bullish Harami hints that the trend is shifting gears, transitioning from a downward trajectory to an upward one.
Unveiling the Characteristics of a Harami Candlestick
The Harami is a two-candlestick deal. The first candlestick is pretty tall, and the second one is way smaller. The kicker is that the second candle's body has to be snugly tucked within the first one. It's like a pregnant woman (the first candle) carrying her baby (the second, smaller candle) inside.
Now, here's the twist: that second candle needs to start its journey in the opposite direction from the first candle. But in the crypto world, gaps are as rare as unicorns, so the pattern might not look exactly the same.
For instance, take a peek at the 4-hour chart for LINK, where a bullish Harami shows up. LINK was on a downward slide, down about 30%. Then, a bigger-than-usual bearish candle shows up, followed by a small green one. Together, they create the bullish Harami. And guess what? That's when a brand new uptrend starts, and LINK shoots up by more than 40%.
Spotting Bullish and Bearish Harami Patterns on a Trading Chart
Now that you've got the hang of what a Harami candlestick looks like, let's dive into where you can actually spot these patterns in the cryptocurrency market.
First up, the Bullish Harami. Think of it as the starting whistle for a fresh bull trend, just like the one you see in the Ethereum chart above. You'll only come across these after a downtrend. When you've been seeing lower highs and lower lows for a while, the Bullish Harami shows up, kicking off with another one of those big, bearish candles. This is a sign that the downtrend might be hitting its peak.
As that candle starts running out of steam, there's a quick rally, but it doesn't go very far. Basically, the sellers are running out of gas, but the buyers haven't fully joined the party yet. This is when the second candle steps in, smaller and snuggled within the first candle's body.
The real deal happens when the market keeps rallying while staying above the recent low. That's when you know the Bullish Harami is the real deal.
Now, let's flip the script for the Bearish Harami.
The Bearish Harami marks the start of a brand new bear trend. So, you'll only spot this bad boy when an uptrend is waving goodbye. As the trend marches higher, like you see in the XRPUSD chart above, the Harami starts with a big green candle, kind of like the grand finale of a mature trend. But it can't keep going up forever, right? The price starts to drop as the high of the second candle stays below the close of the first.
There's no major push to the downside, and that second candle gets swallowed up by the first one. This tells you the market is so feeble it can't muster the strength to reach new highs.
With no fresh buyers in sight, the price takes a nosedive, and that's the beginning of a whole new downtrend.
Harami Cross vs. Doji Candle: Spotting the Difference
Sometimes, Japanese candlestick patterns can seem like distant cousins, making it a bit tricky to tell them apart. Case in point: the Harami Cross candle and the doji pattern. They share some similarities but also have their own unique traits.
To break it down, the Harami Cross is like a blend of the Harami pattern and a star doji.
In this combo, the second candle of the Harami Cross takes on the shape of a star doji, resembling a plus sign. The key rule remains the same: that plus sign must be entirely engulfed within the body of the first candle.
Now, let's talk about the doji candlestick pattern. It has some similarities to the Harami Cross, with the most obvious one being that a star doji is one of the five different doji patterns out there. Essentially, a particular kind of doji finds its way into the second candle of the Harami Cross.
But here's where they part ways. The doji pattern is a lone wolf—it consists of just one candlestick. It's all about uncertainty, leaving us hanging on what the next trend might be.
On the flip side, the Harami Cross is like a trend reversal pioneer. So, when you join forces with the star doji and the hefty candlestick of the Harami, you get a unique pattern that strongly hints at an impending trend reversal.
How to Trade Using the Harami Candlestick
Trading with the Harami pattern comes with some great perks, primarily its ability to send strong signals. These patterns are pretty easy to spot, making them ideal for snagging opportunities with solid risk-to-reward ratios. Below, you'll find a step-by-step guide on how to identify and trade both types of Harami patterns.
Trading with a Bullish Harami Candle
In early 2021, Bitcoin was on a wild upward ride, occasionally taking brief dips that acted as consolidation zones before the next surge.
One such consolidation zone marked the end of a bullish Harami pattern. Let's break down this setup.
- Identify the Downtrend: In January 2021, Bitcoin was in a correction phase after its recent gains. A downtrend is the first sign that sets the stage for a potential bullish Harami.
- Spot the First Candle: On January 21, Bitcoin experienced a significant drop, signaling that traders might be panicking and a bottom could be forming. This sizable red candle becomes the first of the two candles in the Harami pattern.
- Confirm with the Second Candle: The next day, Bitcoin continued a bit lower but closed at a higher price. The body of this second candle should be completely engulfed by the body of the first one. This confirms the bullish setup.
- Set Entry and Stop Loss: The trade plan is quite straightforward. Place a long entry just above the high point of the second candle, which in this case is near $33,800. Set your stop loss just below the lowest point of the Harami pattern. Since there was a recent swing low just below this price zone, it's wise to place the stop loss just under all those low points, near $27,480.
- Calculate Take Profit: Calculate the distance between the entry point and the stop loss, which is $6,320 in this case. To set a take profit level, double this distance to $12,640 and add it to the entry price. So, $33,800 + $12,640 gives you a take profit level of $46,440. This provides a 1:2 risk-to-reward ratio.
- Execute the Trade: Once a few candles pass, trigger the long trade entry for Bitcoin. Now, it's a waiting game, watching for the target or stop loss to be reached. Although prices come close to the stop loss, they never quite hit it and eventually rally to reach the target.
Trading with the Harami pattern can be a powerful strategy, providing clear entry and exit points while managing risk effectively.
Trading with the Bearish Harami
Let's dive into trading using the Bearish Harami with a real-world example from Bitcoin's daily chart in March 2021. At this time, Bitcoin was on a relentless climb, reaching new all-time highs. The rally had been robust and showed no signs of slowing down.
- Identify the Uptrend: Bitcoin was clearly in rally mode, riding a well-defined uptrend (I). The rally reached its zenith on March 13, as indicated by a substantial green candlestick—the first component of the Harami pattern (II). This candle signals strong buying pressure in the recent trend.
- Enter the Bearish Harami: The very next candle opens the door to a corrective move, halting roughly midway into the range of the first candle. This red bearish candle becomes the second part of the Harami pattern (III).
- Signal for Entry: The trader now waits for the low of the second candle to be breached, signaling a bearish entry into the position (IV).
- Place Stop Loss: To manage risk, the stop loss is strategically placed just above the highest point of the Harami pattern (V).
- Set a Target: The target is set at a minimum of twice the distance from the entry to the stop loss (VI).
Within a couple of weeks, Bitcoin's price hits the target without triggering the stop loss. This example showcases how the Bearish Harami pattern can offer a narrow risk range while delivering favorable risk-to-reward trading opportunities.
Is the Harami Pattern a Foolproof Guarantee of Accuracy?
Remember, not every trade will end up in your favor. It's unrealistic to expect all your trades to be profitable, and the same principle applies to the Harami pattern.
While the Harami pattern is relatively easy to spot and can lead to successful trades with a favorable risk-to-reward ratio, it doesn't guarantee that every trade will be a surefire winner. That's why it's advisable to stick to a 1:2 risk-to-reward ratio in the trading strategies outlined above.
By doing so, you allow yourself room for error, where you can be right in less than half of your trades but still have a chance to grow your account because your winning trades outweigh your losing ones.
Harami candlestick patterns are a popular choice among cryptocurrency traders. They appear frequently in crypto markets, and the trading process is straightforward. Traders appreciate the narrow risk range and the potential for substantial rewards that the Harami pattern offers.
However, just like any other tool in technical analysis, the pattern doesn't come with a guarantee of consistently producing winning trades. For the best results, it's essential to spot the Harami pattern in the right trend context and combine its use with other trading tools for a more comprehensive approach.