The word “harami” means “pregnant” in Japanese, an apt description of the appearance of this two-session candlestick signal. This pattern is the opposite of the engulfing pattern, in which a small session is surpassed, or engulfed, by the one that follows. In the harami, a long session is followed by a much smaller session of opposite color. This is the pregnant part, the protrusion that signals a reversal.
Like most candlestick patterns, the harami can be either bullish or bearish. A bullish version consists of a black set-up session, followed by signal session with a white session that is located entirely within the range of the previous day. When this is seen after an extended downtrend, it foreshadows a reversal and uptrend.
A bear harami has the same characteristics, but opposite colors. The set-up is a white session, followed by the signal session in black, and smaller on both top and bottom than the previous session’s range.
The harami cross has the same characteristics as the harami, with one exception. The signal day forms as a doji, the classic swing trading narrow range day. The doji consists of a horizontal line, meaning the open and close were the same or very close; and a vertical extension above and below the horizontal, representing the trading range of the session. It looks like a cross. Swing traders like to see narrow range days because they are strong reversal signs. In the case of the harami cross, the two-session indicators makes the narrow range day stronger.
Potential failure of these patterns -- meaning a false indication -- is always possible, which is true for all technical indicators. So it is imperative that the harami and harami cross are viewed as indicators requiring confirmation (or confirming a separate indicator). Notably strong separate indicators are movement in subsequent days in the expected direction or a volume spike on the signal session or the session immediately following. A strong price gap between subsequent sessions, moving in the expected direction, also represents especially strong confirmation of what harami or harami cross reveal.
Every candlestick formation should be used in conjunction with the “big picture” of what is taking place in price and volume, testing of support or resistance, gapping action (especially repetitive gaps), and other traditional Western technical signals. Remember, candlesticks, even especially strong indicators found within their formations, are not foolproof. But they do improve your overall entry and exit timing.
Michael C. Thomsett is an investing and options author and has also written for FT Press’ Agile Investor series, which can be viewed on FTPress.com. Thomsett’s latest FT Press book is Trading with Candlesticks.