Sunday, March 23, 2014

Candlesticks: Bearish Harami

The bearish harami is one of the major candlestick patterns that displays common sense in graphic depiction. The elements that create a bearish harami produce clear insights into investor sentiment at a reversal.

Description
The Bearish Harami is the exact opposite of the bullish harami and its presence indicates that the trend is over. It is composed of a two-candle formation with the body of the first candle the same color as the current trend. The first body of the pattern is a long body and the second body is smaller. The open and the close occur inside the open and close of the previous day.

Criteria
  • The body of the first candle is white or green and the body of the second candle is black or red.
  • The uptrend is apparent and a long white or green candle occurs at the end of the trend.
  • The second day opens lower than the close of the previous day and closes higher than the open of the prior day.
  • Confirmation is needed for a reversal and the next day should show weakness.

Signal Enhancements
  • The longer the white or green candle and the black or red candle, the more forceful the reversal.
  • The lower the black or red candle closes down on the white or green candle, the more convincing it is that a reversal has occurred, despite the size of the black candle.

Pattern Psychology
After a strong uptrend has been in effect and after a long white or green candle day, the bears open the price lower than the previous close. The longs get concerned and begin profit taking as the price finishes lower for the day. The bulls are now concerned as the price closes lower and it has now become evident that the trend has been violated. A weak day following convinces everyone that the trend was reversing. Volume increases as a result of profit taking and the addition of short sales.

Harami signals provide an opportunity to maximize returns and they have excellent capabilities of indicating how strong the new trend to the upside will be. If all of your investment funds are currently fully used, the Harami may reveal that one of the positions has stalled for a few days. An aggressive trader may opt to move those funds to a better trade and then return in a few days to reinvest once the position is moving.

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