Thursday, July 1, 2021

Candlesticks: Bullish Harami

The bullish harami is often seen and is one of the 12 major candlestick patterns. This pattern is composed of a two-candle formation in a down-trending market. The body of the first candle is a long body and is the same color as the current trend while the second body is smaller. The open and the close occur inside the open and the close of the previous day.  The appearance of the bullish harami indicates that the trend is over. The Japanese definition for harami is pregnant woman or body within. The first candle is black or red which is a continuation of the existing trend. The second candle which is the little belly sticking out is usually white but not always. The location and size of the second candle will influence the magnitude of the reversal.

Criteria for Bullish Harami

  • The body of the first candle is black or red and the body of the second candle is white or green.
  • The downtrend has been evident for a good period since the long black or red candle occurs at the end of the trend.
  • The second day opens higher than the close of the previous day and closes lower than the open of the prior day.

Unlike the Western “Inside Day” just the body needs to remain in the previous day’s body, where as the “Inside Day” requires both the body and the shadows to remain inside the previous day’s body.
For a reversal signal further confirmation is required to indicate that the trend is now moving up.

Signal Enhancements
  • The longer the candle the more forceful the reversal.
  • The higher the white or green candle closes up on the black or red candle the more convinced we are that a reversal has occurred (despite the size of the white or green candle).

Pattern Psychology of the Bullish Harami
After a strong down-trend has been in effect and after a selling day the bulls open the price higher than the previous day’s close. The shorts get concerned so they start covering while the price finishes higher for the day. This is enough support to have the short sellers take notice that the trend has been violated. A strong day the following day convinces everyone that the trend was indeed reversing. Usually the volume is above the recent norm due to the unwinding of short positions.

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