Harami Candlestick Pattern Definition: Day Trading Terminology
The Harami candle pattern is a reversal pattern used in technical analysis to predict an upcoming change in price trends. Harami candle patterns can be either bullish or bearish as reversal indicators, since they always involve a large candle on the first day followed by a small opposite candle on the second day.
The defining feature of this pattern is the gap up or down on the second day, which signals a likely change in market sentiment as opposed to simply a trading day where the previous day’s close was not surpassed.
Harami Candle Pattern Example
A bullish Harami candle pattern would downtrend followed by a small green candle that closed right near the open and will look almost like a cross as you can see in the example above.
A bearish Harami candle pattern will happen during an uptrend where the top candle closes near the open after being up and down on the day and will also look like a little cross.
These candle patterns work best when the stock is in a trend and its time for a reversal.
Trading with a Harami Candle Pattern
Harami candle patterns are a great way to find potential trades because they are so easy to spot with just a simple visual scan of a candlestick chart. While not all Harami candle patterns lead to a reversal, most reversals will involve a Harami candle pattern, so they are a common sight on candlestick charts for many volatile securities.
Most day traders use a Harami candle pattern as an indicator that there will be a strong trend in the subsequent trading days, which will allow them to trade with the momentum of a security’s price for those days.
Momentum or trend trading has become one of the most popular trading strategies in contemporary day trading as it allows day traders to employ otherwise risky strategies with the reasonable confidence that the price will eventually turn their way in the short term, even if a trade goes against them right away.
A Harami candle pattern indicator should be followed up with additional analysis before being used as a reason to enter a trade. This analysis can involve additional complementary indicators, a review of any relevant news or information or more fundamental analysis of a stock’s financial reports.
Harami candle patterns are an excellent indicator for identifying potential changes in trends. Being able to correctly predict a trend allows day traders to employ a number of highly effective strategies to make one or more trades on a trending security.
Correctly identifying trends is one of the best methods for day traders to trade successfully, and the Harami candle pattern is a very common indicator that precedes most reversals and opposite trends. However, all Harami candle patterns should be backed up by additional analysis to better ensure that a reversal and subsequent trend will follow.