Many traders have heard about the harami pattern, but few actually know how to trade it.
Bullish Harami Patterns are a great way to trade currencies, and they’re easy to understand.
In this post, we will describe the bullish harami pattern in general, and then we will show you how to identify the right entry-level to trade this pattern.
I’ll also give you the three quick steps to make this pattern easier for you to understand and trade.
Let’s get started.
What is a Bullish Harami Pattern?
The bullish harami pattern is part of the bullish candlestick patterns family.
This is also known as an inside bar, which is its more popular name – so if you’ve already read about the inside bar, then you already know what the harami formation is and how powerful it can be.
When these form, we can expect a reversal in the market to happen from a downtrend to an uptrend.
This is a two-candlestick pattern and is formed with a large candlestick and a second – smaller – candlestick that opens and closes within the range of the first candlestick, or in other words stays inside the first candlesticks trading range.
It has an opposite version of the candlestick formation called a bearish harami pattern.
This pattern does appear quite frequently, which brings us on to the next bit:
Bullish Harami Pattern: Continuation or Reversal Patter?
Due to the frequency of the candlestick pattern, the bullish harami pattern is a continuation or a bar reversal candlestick pattern of price movement that can occur in many markets.
It is one of the most popular trading patterns in forex, and it has been used by a lot of traders to make money in the markets.
What this means for traders is that if you identify a bullish harami candlestick in either a downtrend or an uptrend it can give you two different, yet still bullish ideas.
If the harami formation develops at the end of a downtrend, then it becomes a reversal signal.
If the harami formation develops during an uptrend, this is a continuation signal.
Long story short, no matter where these are found – they still indicate a potential bullish movement will happen shortly after.
What Does The Bullish Harami Pattern Tell Us?
This is part of the education I think is most important when it comes to trading.
Understanding why and what these bullish harami patterns mean is what gives you an edge.
The bullish harami pattern is a great indicator of a potential bullish reversal.
So what does it mean?
Well, when this pattern develops at the end of a trend it shows that the seller’s pressure to keep the market lower has been met by buyers who believe the price is strong enough to enter the market.
We can tell this because the first candlestick of the pattern is a large-bodied candlestick, which suggests a large volume of trading has occurred in that session.
Then for the buyers to pick up the price quickly and challenge this large volume of sellers, also suggests that there is a surge of buyers entering the market.
Bear in mind that these could be take-profit orders too, thus sellers closing their positions and taking profits.
With this in mind, you will now understand that the scales have potentially tipped in favour of the buyers now, thus creating a reversal.
How to Identify the Bullish Harami Pattern?
Now you know the theory of a harami formation, time to look at how to identify the formation.
We are looking for two candlesticks, 1 large-bodied selling candle and 1 small-bodied buying candle.
It’s a very simple candlestick pattern to find, this is what it looks like:
The wicks on the small-bodied candlestick must also be within the first candlestick.
Most people say it doesn’t matter, but based on my experience, I think it helps validate the trades better.
The above example is what you’d expect to see in most markets, but if you are trading forex, there is a slight difference.
Instead of the second candlestick is completely within the first, you will find that it is more often matching the close of the first candlestick only.
Like so:
That’s all there is to finding these patterns and correctly identifying them.
Now it’s time to learn how to trade one.
How to Trade a Bullish Harami Pattern?
Trading these patterns are super easy. You should be able to pick up these patterns and able to practice with them immediately as there is not much for you to analyse, to be honest.
That is why they are great for traders new to this and I highly recommend every trader be on the lookout for them on their chart scans.
I’ve simplified the process, so let’s get stuck in:
Step 1: Identify the Bullish Harami Pattern
Firstly, we have to uncover what type of trend we are in:
Downtrend or an uptrend.
If we are in a downtrend, then we are looking for a reversal pattern.
If we are in an uptrend, then we are looking for a continuation pattern.
In this example, we are using a downtrend to emphasise the bullish reversal pattern.
We look to identify the pattern by finding the 1 large-bodied candlestick and 1 small-bodied candlestick that is within the open, high, low, close of the first candlestick pattern, like so:
As you can see, this is an ideal setup for the trade.
Step 2: Prepare The Trade
I like using pending orders, so it’s the way I teach these setups.
If you prefer to enter at the market, then you can do so after the pattern has formed.
However, I prefer the market to confirm the direct so I set up a pending order like so:
Market Entry: Above the large-bodied candlestick’s high (usually 2-3 pips higher).
Stop Loss Order: 2-3 pips lower than the large-bodied candlestick’s low.
Take Profit Order: Nearest logical market structure, or resistance level.
This gives you a good chance to enter with the market momentum and push higher, as well as avoid a potential false or weak signal generated.
Because if the price doesn’t hit our entry-level, we don’t enter and therefore we don’t risk our capital, so we can move on with another trade.
Step 3: Execute
With the trade executed after the bullish harami candle pattern, there is not much more you need to do apart from managing the risk.
As an example:
You can use a trailing stop loss to lock in profit along the way.
The Result:
As you can see in the example, the market entered our position above the high and continued to rally further.
This trade hit our take profit which was set at the resistance level based on the market structure on the left.
The pattern generated 23 pips, which isn’t bad, especially considering the risk outlay.
Conclusion:
So there we have it:
I have shown you how to trade the bullish harami pattern.
You should have seen how the pattern forms, and you should now understand why this pattern forms.
Next, you should know how to find it, and how to trade it.
Finally, I have shown you how to execute the trade.
So there you have it, you now know how to trade a bullish harami pattern.
If you want to learn more about all candlestick patterns, then click on the articles below to learn more: