Bearish Harami Candlestick Pattern
A Bearish Harami candlestick pattern is a bearish reversal candlestick pattern. While a majority of the candlestick patterns are single candlestick patterns, the Bearish Harami candlestick pattern is a 2 candlestick pattern.
When the 2nd candlestick in the pattern is a Doji candlestick pattern, the Bearish Harami candlestick morphs into a Bearish Harami Cross candlestick pattern.
Bearish Harami Cross candlestick patterns have a higher success rate for trend reversals when compared to ordinary Bearish Harami candlestick patterns. Matter of fact, the smaller the real body is for the 2nd candlestick, the higher the chances are for a successful bearish trend reversal.
Requirements
Listed below are the requirements for a Bearish Harami candlestick pattern.
- A Bearish Harami candlestick pattern is a 2 candlestick pattern
- The 1st candlestick in the pattern can have either a red or green colored real body
- The real body of the 1st candlestick engulfs the real body of the 2nd candlestick
- It is not necessary to engulf the upper and lower shadows too, but if it does that makes the pattern even more bearish
- It is not necessary to engulf the upper and lower shadows too, but if it does that makes the pattern even more bearish
- When the 2nd candlestick is a Doji candlestick pattern, the Bearish Harami candlestick pattern morphs into a Bearish Harami Cross candlestick pattern
If there is one last push upwards after a Bearish Harami candlestick pattern develops, it is usually[s2If !current_user_can(access_s2member_level1)]…..
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Characteristics & Observations
These are some of the characteristics I have observed for Bearish Harami candlestick patterns over the years.
- The smaller the real body is for the 2nd candlestick in the pattern, the greater the probability for a successful bearish trend reversal
- It is not necessary to engulf the upper and lower shadows too, but if it does that makes the pattern even more bearish
- What starts out as a Bearish Harami candlestick pattern could morph into a Bearish Tower Top candlestick pattern, further increasing the probability of a bearish trend reversal
- Bearish Harami candlestick patterns tend to develop in either Wave 4 of a Bullish Impulse wave pattern or in Wave A of some type of corrective wave pattern, like a Zig-Zag wave pattern or a Triangle wave pattern of some sort
Bullish Counter-Part
The bullish counter-part to the Bearish Harami candlestick pattern is the Bullish Harami candlestick pattern.
The main difference between the Bearish Harami candlestick pattern and the Bullish Harami candlestick pattern is where they develop on a stocks chart. A Bearish Harami candlestick pattern develops at the top of an uptrend while a Bullish Harami candlestick pattern develops at the bottom of a downtrend.
Bearish Harami candlestick patterns are more reliable as bearish trend reversal patterns than Bullish Harami candlestick patterns are as bullish trend reversal patterns.
Resistance Area
The very top of the upper shadow is the resistance area for a Bearish Harami candlestick pattern. If the Bearish Harami candlestick pattern does not have an upper shadow, then the top of the real body is the resistance area.
A close above the resistance area for a Bearish Harami candlestick pattern nullifies the candlestick’s resistance. When the Bearish Harami candlestick pattern develops on heavier than normal selling volume, do not anticipate a break above the resistance area on the 1st attempt. The 2nd attempt is suspect at times too. As they say though, the 3rd time is usually the charm.
Trading Strategies
I will review 2 different trading strategies for this bearish reversal candlestick pattern. The first strategy will review scaling-out of a position that you hold when the candlestick pattern develops. The second and more aggressive strategy will involve entering into a short sale position based on further anticipated declines in the share price.
Always be sure to step back and analyze the “trend of one larger degree“. This can help you determine if the pullback is going to be shorter-term in nature or if it is the start of something extremely more bearish in nature.
If You Are Currently Long the Stock
You may have noticed other sell signals flashing before the development of the Bearish Harami candlestick pattern. If you did and already scaled out of a few shares, congratulations. If that is not the case and you are still holding all your shares, you will want to begin a scale-out process. Use the very first re-test of the resistance area as an opportunity to make a scale-out sale.
If the re-test of the resistance area fails, as it usually does on the first re-test, another scale-out sale could be made. That would leave you with about 1/3 of your holdings left. I prefer to use a 3 step scale-out process. If you want to be sure to lock in gains at higher prices, you can be more aggressive and use a 2 step scale-out process. You can determine what you want to do with the last 1/3.
One thing to keep in mind is the scale of the chart where you see the Bearish Harami candlestick develop. Is it a daily chart? Is it a monthly chart? The scale of the chart will help to determine the speed in which your selling actions need to take place.
For example, if you notice a Bearish Harami candlestick pattern develop on a monthly candlestick chart, you may have 1-3 weeks to execute the scale-out process and try to maximize profits. But be quick because a larger drop is coming. When a Bearish Harami candlestick pattern develops on a daily candlestick chart, you may between 1-3 days to execute the scale-out process.
It is very important to keep everything in perspective based the scale of the chart you are analyzing. Also use other technical analysis methods for confirmation rather than relying on the candlestick pattern by itself. These other method can help to provide additional areas that can be used as scale-out areas once the downtrend is confirmed.
If You Are Looking to Short the Stock
Before entering into a short position, wait for confirmation of the Bearish Harami candlestick pattern. Confirmation involves the beginning of the next candlestick’s development. Wait for the first break to happen, either a break above the resistance area or a break below the pattern on heavy selling volume. If the break to the downside occurs, that is the confirmation to short sell the stock.
Ensure the selling volume and selling momentum are both increasing. A MACD Histogram is a great tool to use when monitoring buying and selling momentum. Make sure there is an increase in the selling momentum after the development of the Bearish Harami candlestick pattern. Any slow down in selling momentum is an early indicator to start analyzing the charts and thinking about locking in short sale profits. This is simply done by purchasing shares to cover the shares sold short.
Since prices tend to move down quicker than they move up, short selling can be a very profitable trading strategy. However, it does carry the additional risk of “unlimited losses” when compared to going long on a stock. You need to know when to lock in losses in order to be a successful short seller. If you have a hard time selling anything for a loss, don’t use short-selling as a strategy. If you are not quick to pull the trigger on a loss, that loss can start leading to exponentially larger losses.
In order to minimize risk on a short position, only enter into a short sale trade after capitulating buying volume takes place. Look for a Climax Top volume spike. A capitulating volume spike helps to confirm the bearishness of a Bearish Harami candlestick pattern.
Stop-Loss on Short Sale
To try and further minimize risk, a stop-loss order should be used on all short trading strategies. For a Bearish Harami candlestick pattern, place the stop-loss order in 1 of 2 places:
- at the resistance area from the pattern as described above
- place a tighter stop-loss order at the top of the 2nd candlestick in a Bearish Harami candlestick pattern
- a tighter stop-loss order will try to limit losses on any attempted push above the resistance area from a Bearish Harami candlestick pattern
- a tighter stop-loss order will try to limit losses on any attempted push above the resistance area from a Bearish Harami candlestick pattern
After forming the 2nd candlestick in the Bearish Harami candlestick pattern, any meaningful downtrend should probably start within the next candlestick or two. Look for the selling volume to start increasing along with an increase in selling momentum as indicated by the MACD Histogram chart tool.
Real Chart Examples
This chart is a 2 year weekly candlestick chart for Groupon (GRPN) that illustrates a Bearish Harami candlestick pattern. This particular Bearish Harami developed right under the resistance area from a Bearish Engulfing candlestick pattern. This dual resistance area will take some significant buying volume to break through and stay above on any attempted rebound.
Analyzing a Double Bearish Candlestick Resistance Area Created by a Bearish Harami Cross Candlestick Pattern and a Bearish Engulfing Candlestick Pattern
The break above the dual resistance areas barely lasted between quarterly reports for Groupon (GRPN). The Bearish Harami Cross candlestick pattern for GRPN gave an indication for a better than not chance of its share price pulling back. The earnings report the following week confirmed the Bearish Harami Cross candlestick pattern. However, if you waited for confirmation with this pattern, you ended up selling for 20%-25% less than immediately selling when the pattern developed.
If you were sitting on gains because you purchased shares based on the development of the Bullish Engulfing candlestick pattern, you may have been able to sit through the pullback and maybe even made another scale-in purchase as the share price revisited the strong bullish reversal candlestick. Otherwise, the pullback may have been painful if you were purchasing shares during the uptrend.
The pullback currently in progress appears poised to eventually re-test the support area from the Bullish Engulfing candlestick pattern. The support and resistance areas identified for GRPN may even provide a Trading Channel type of range for its share price over the next year or two.
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