Bearish Harami Candlestick Pattern – Formation And Trading Plans
Bearish Harami Candlestick Pattern – Formation And Trading Plans
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Bearish Harami Candlestick Pattern: Technical analysis is a method for forecasting future price movements using previous market data, with a primary focus on price and volume. Candlestick patterns stand out as visual representations of price activity over a set span. These patterns, created by open, high, low, and close prices, provide information on market mood and prospective trend reversals or continuations.
Candlestick patterns help traders make educated judgments about buying and selling stocks because they give vital information about market dynamics and prospective trading opportunities. In this article, we will discuss one such candlestick pattern called the bearish harami candlestick pattern.
Bearish Harami Candlestick Pattern – Definition
The bearish harami candlestick pattern is a two-candlestick pattern that indicates a reversal towards the downside in the stock. A bearish harami candlestick pattern consists of a large bullish candlestick (green candle) followed by a bearish candlestick (red candle).
Here, the red candle is formed within the first candle’s body. This means that the high and low prices of the red candle are within the open and close price range of the first candle. The prior trend is preferred to be an uptrend before forming this pattern as this increases the probability of a bearish reversal.
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Bearish Harami Candlestick Pattern – Meaning
As the bearish harami candlestick pattern indicates a bearish reversal, this pattern is preferred to be formed at the top of an uptrend. The first candle formed in this pattern is a long green candle. This is due to there being more buying pressure as the stock is in an uptrend.
The second candle opens lower than the close price of the first candle. This candle closes below its open price hence forming a red candle. Moreover, in that duration, the price of the stock does not go above the close price of the first candle nor go below the open price of the first candle. In other words, the red candle is contained within the green candle.
This formation of a red indicates that the sellers are gaining momentum in stock further indicating a potential end of the uptrend. Due to this, there might be a profit booking which can further bring down the stock price. Thus, the formation of this pattern is generally seen with a bearish momentum in the stock price.
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Bearish Harami Candlestick Pattern – Strengths
There are a few situations where the formation of the Bearish Harami candlestick pattern gives a stronger bearish reversal indication.
- Formation near a resistance zone: The formation of the Bearish Harami pattern near a resistance zone is a strong indicator that the price of the stock might fall. This is because there might already be several sell orders in that zone, and the formation of this pattern increases the chances of a bearish reversal.
- RSI in an overbought zone: When RSI levels are above 70, it indicates that the stock is in an overbought condition. The formation of the Bearish Harami pattern accompanied by the RSI levels (above 70) give greater conviction of the bearish reversal.
Bearish Harami Candlestick Pattern – Trading Plans
Traders must ensure that the prior trend before forming this pattern is an uptrend. Once this pattern is formed in an uptrend, the following are the guidelines to take a trade:
- ENTRY: When the price of the security goes below the open price of the first candle in this pattern, traders can take a short entry.
- TARGET: Traders can exit the trade when the price of the security reaches near the immediate support zone. Once this level is reached, they can also book partial profits in the trade and hold on to the remaining position until the next support level.
- STOP LOSS: Traders can place the stop loss near the close price of the first candle in this pattern.
Bearish Harami Candlestick Pattern – Example
In the above one day-chart of INFOSYS LTD., we can observe the formation of the bearish harami candlestick pattern at the top of an uptrend. As discussed in this article, the price of the stock saw a downward trend after the formation of this pattern.
At the time of the formation of this pattern, traders could have taken a short entry when the price of the stock started trading below Rs.1596.65 and the stop loss was at Rs. 1617.45
Difference between Bearish Harami Pattern and Bearish Harami Cross Pattern
The bearish harami candlestick pattern is defined by two candles, in which the second one is a proper red candle that forms within the body of the first. However, in the bearish harami cross candlestick pattern, the second candle is a doji candle. The formation of the bearish harami candlestick pattern is a slightly stronger bearish reversal indication since the presence of a proper red candle in the second position shows higher selling pressure, while a doji indicates that the buying and selling pressure was equal.
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Conclusion
In conclusion, the bearish harami candlestick pattern serves as a powerful signal for traders seeking to navigate volatile markets. Its formation, characterized by a small bearish candlestick engulfed within the body of a larger bullish candlestick, suggests a potential reversal.
However, as with any trading signal, it’s crucial to consider additional factors and employ risk management strategies. By integrating the bearish harami pattern into their trading arsenal, traders can enhance their ability to capitalize on market fluctuations and optimize their trading outcomes.
Written by Praneeth Kadagi
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