Inside the Harami: A Step-by-Step Guide to Trading the Harami Pattern

In the world of Forex trading, there are several chart patterns that can signal potential price movements. One of the most popular chart patterns is the Harami, which is a Japanese term that translates to “pregnant”.

The Harami pattern appears quite frequently and identifying it correctly can give traders a significant advantage. The Harami pattern indicates a potential trend reversal and a high probability of a price move in the opposite direction of the previous trend.

In this article, we’ll offer a comprehensive guide on how to trade the Harami pattern, including its definition, how to recognize it, different types, and how to trade it.

The Harami Pattern Definition

A Harami pattern occurs when a small candlestick (the “inside candlestick”) is entirely contained within the range of the previous candlestick (the “outside candlestick”).

The outside candlestick is usually longer and engulfs the inside candlestick entirely.

The Harami pattern is mainly used to identify a trend reversal from an upward or downward trend.

How to Recognize the Harami Pattern

Identifying the Harami pattern correctly can help traders to make better trading decisions based on the trend. To recognize the Harami pattern, you must follow these steps:

1. Look for a visible trend in the chart. The trend could be an uptrend or a downtrend.

2. Look out for the outside candlestick, which is always a long, bearish or bullish candlestick, depending on the trend.

3. Identify the inside candlestick, which must always be a different color than the outside candlestick.

4. Confirm that the inside candlestick is completely contained within the range of the outside candlestick.

5. Wait for confirmation of the pattern from other technical indicators like volume, Moving Averages, and trend lines.

Types of Harami Patterns

There are two primary types of Harami patterns, the Bullish Harami and the Bearish Harami.

The Bullish Harami

The Bullish Harami pattern is a two-candlestick pattern that signals the end of the bearish trend and a potential bullish reversal. The pattern’s formation occurs when a shorter bullish candlestick follows a longer bearish candlestick, and the former stays within the vertical range of the latter.

The Bullish Harami pattern’s outside candlestick could be any bearish candlestick, like the bearish Marubozo or the bearish Engulfing pattern. The inside candlestick must open above the outside candlestick’s close and close higher than its opening price.

The Bearish Harami

The Bearish Harami pattern is a two-candlestick pattern that signals the end of an uptrend and a potential bearish reversal. The pattern’s formation occurs when a shorter bearish candle follows a longer bullish candle, and the former stays within the vertical range of the latter.

The Bearish Harami pattern’s outside candlestick could be any bullish candlestick, like the bullish Marubozo or the bullish Engulfing pattern. The inside candlestick must open below the outside candlestick’s close and close lower than its opening price.

How to Trade the Harami Pattern

Once you have identified the Harami pattern, you can use it in your trading strategy. Here are some tips on how to trade the Harami pattern:

1. Wait for confirmation: Before you enter into any trades, wait for a confirmation of the Harami pattern with additional technical indicators like trend lines, Moving Averages, and volume.

2. Determine your entry and exit points: Once you have confirmation of a Harami pattern, you need to determine your entry and exit points. You can use support and resistance levels in the chart to identify your entry point and your stop loss level.

3. Manage your risks: Always manage your risks carefully by using stop-loss orders to limit potential losses.

4. Consider the trend: If the Harami pattern appears during an ongoing trend, take into consideration the trend’s strength and wait for confirmation before entering into a trade.

Conclusion

The Harami pattern is one of the most reliable chart patterns to identify potential trend reversals. It signals a potential reversal in an uptrend or a downtrend and can help traders to make better trading decisions.

To effectively trade the Harami pattern, traders need to wait for confirmation with other technical indicators, determine their entry and exit points, and manage their risk carefully.