Candlestick Tutorial – Haramis
In this series on candlestick formations, we will take time to break down several important candlestick formations that constitute market defining moments in the market, and also discuss how they can be combined with other technical indicators to produce signals with a high degree of accuracy. We start this series with a discussion on Haramis.
The word “harami” means pregnant. The harami is a two-candle reversal candlestick formation. There are two varieties of the harami candlesticks:
a) The Bullish harami, which is a bullish reversal candlestick formation made up of a long bearish candlestick (Day 1 candle) and a short bullish candlestick (Day 2 candle) which is enveloped within the Day 1 candle so that it looks like the Day 1 candle is pregnant with the Day 2 candle.
b) Bearish harami, which consists of a long bullish Day 1 candlestick and a short bearish Day 2 candlestick which is enveloped by the Day 1 candle so that the Day candle looks like it is pregnant with the Day 2 candle. The bearish harami is a bearish reversal candlestick.
So whenever traders are looking to recognise this candlestick formation, they should always keep in mind that haramis resemble a long figure (Day 1 candle) with a “pregnancy” (Day 2 candle).
How to Trade Haramis
Haramis are reversal patterns: they are used to predict trend changes on the charts. Hence, the best signals produced by haramis occur either at the top of an uptrend (bearish harami) or at the bottom of a downtrend (bullish harami). Haramis on their own, should not really be used as your sole reason to initiate a trade. Therefore the reinforcement by other technical indices is necessary in order to get the best out of this candlestick formation. Some of these indices are as follows:
1) Appearance of a bullish harami at the bottom of a downtrend.
2) Bullish harami forming at a strong support.
3) Bullish harami forming at a period when market is oversold (as shown by Stochastics cross at <25).
A look at this chart above will show that parameters (1) and (3) were met, giving a strong Buy signal.
1) Appearance of a bearish harami at the top of an uptrend.
2) Bearish harami forming at a strong resistance.
3) Bearish harami forming at a period when the market is overbought (Stochs cross at >75).
The chart above shows that parameters (1) and (3) were met, confirming a Sell signal.
Please note that sometimes, the harami patterns may form at other areas on the chart. However, these do not produce valid signals because they usually do not conform to the parameters for trade entry that have been spelt out. Haramis should only be used for trading if they meet the criteria that have been set out for entries.
The time frames on which the signals are based will determine how long the harami trade will last. The best results are obtained from the daily charts because the daily charts are charts that show the true trend of a currency pair, and the range of prices are wide, so a single trade is able to produce as much as 400 to 600 pips of movement for a single trade. So while haramis can be used to trade on the hourly charts, best results are obtained when they are traded on the daily charts.
Trade Exit Rules
Possible clues as to when to exit a trade are:
a) The trader is satisfied with profits made from the trade.
b) A trader decides to lock in profits by using the trailing stop function.
c) For a bearish harami trade, price action is now at strong support
d) For a bullish harami trade, price action has reached a strong resistance.
e) Appearance of a contrarian candlestick pattern after a strong move in a harami trade.