Bearish Harami Cross Candlestick Trading Tutorial and Example
The bearish harami cross candlestick pattern is an infrequently forming though very strong candlestick pattern. Usuall formed during an uptrend, it signals the possibility of a strong price reversal leading to a decline in prices in coming times. Traders take its formation as a very strong signal to go short that is - to sell the stock, hence the candlestick pattern's name includes the word 'bearish'. Compared to the frequently forming bearish harami pattern, the bearish harami cross is considered to be relatively stronger and a much more reliable signal. A few of the traders may wait for a confirmation after the formation of the bearish harami cross pattern, the other experienced ones may enter a trade directly on the formation of the bearish harami cross pattern. This article explains the details of how the bearish harami cross candlestick is formed, what market conditions are indicated by its formation, how to trade the bearish harami cross candlestick, and the article also covers the most recent examples of the same. To understand the working and trading of the bearish harami cross candlestick, let's start by checking the factors needed for its formation.
Construction of the Bearish Harami Cross CandlestickThe bearish harami cross candlestick is formed by two adjacent candles. The first candle is a large-sized green-colored bullish candle which is a part of an ongoing uptrend. After such a bullish candle, if a doji candle with zero-length body forms then we have the the bearish harami cross pattern on the price charts. A doji candle usually does not have a body - that is, the length of the body which is constituted by open and close prices is zero. It only has wicks or shadows of the candle. That means, the open and close price of the second candle are the same (hence zero-sized body), and high and low prices may be a bit distant to each other. However, a few traders may like to consider a small-sized body also as a doji, and may act on the pattern that emerges with non-zero but very small sized candle's body. The color of this doji candle does not matter - it can be green or red.
Formation of two such candles back-to-back during an uptrend constitute the bearish harami cross pattern.
The first red candle must be long enough such that it 'covers or engulfs' the next doji candle completely. The first candle cannot be a doji because it needs to engulf the second one. Most traders keep their analysis of the bearish harami cross pattern limited to the body lengths of the two candles only, and the shadows or wicks of the candle are ignored. Body is formed by open and close prices, while wicks/shadows are formed by high and low prices.
As the candlestick pattern analysis emerged in Japan, many of the candlestick patterns for stock price analysis are named in Japanese language. The word 'Harami' in Japanses language means 'pregnant'. A look at this bearish harami cross pattern formed by the two candles represents a woman carrying a baby, hence the name. The first red-colored long bearish candle is often called the 'mother candle', while the second short-sized doji candle is often called the 'baby candle'.
The body of the second candle should lie somewhere in the lower half of the first candle.
The next requirement for a reliable bearish harami cross pattern is that it should form during an ongoing upward price move. Formation of a doji candle indicates that the price reversal is possible, and the ongoing trend of the green-colored candles is expected to come to an end. Many traders may like to wait for a third confirmation candle to be formed. If a red colored confirmation candle is formed, it further confirms the premise that the uptrend has ended and the prices are set to go downwards in near future. Its time to go short on the stock (sell), or cut the losses if already holding a long position. This is how a typical bearish harami cross candlestick appears:
Trading the Bearish Harami Cross CandlestickThe infrequent formation of the bearish harami cross pattern may not be that good sign for trading, but it is considered a very strong signal for price reversal. Let's understand what leads to its formation - that is, the primary reasons of the market which form the bearish harami cross.
A bearish harami cross is preceeded by an uptrend, which indicates that the buyers (bulls) have been in command of the market and have outpaced the sellers (bears). Amid this pattern, appears a doji as the second candle which completes the bearish harami cross pattern. This formation indicates that market is now entering an indecisive state, as the doji's intrinsic property is indecisiveness.
The bears are now known to hit the ground running by getting back in action, and are now able to match the bulls which is why the doji has been formed. Most experienced traders upon seeing the cross patter formed with doji will enter the trade as they may be aware of other market factors like volume and range breakouts. The other traders may like to wait for the formation of the confirmation candle with a bearish note which then indicates that the sellers have outplayed the buyers, and a downtrend is about to follow. If the doji and/or the confirmation candle is accompanied by a considerably large volume, then it adds to the chances of price reversal. The sellers have returned to the market in full swing with high selling pressure, and hence getting stronger and lowering down the prices. Therefore, its time to go short - that is, sell the stock, or cut the losses if holding a long position.
The bearish harami cross candle pattern gains significance when formed during the uptrend. The formation sets the backdrop for a potential reversal in prices after the long upward move in the stock prices. Traders enter the trade when the bearish harami cross is formed at the upper Bollinger band breakout, or at the breakout of the trend-line (like 200-day moving average), or similar other range breakouts. The larger the breakout indicated by the length of the doji candlestick, the stronger the reversal pattern. If the bearish harami cross is formed in the middle Bollinger band or far away from the trend-line (without breaching the trend-line), then the traders may not consider it as a strong reversal signal and they avoid the trade. When formed around the middle band or away from the breakout range, the bearish harami cross often leads to continuation of the existing trend instead of a reversal.
Trading Scenario for Bearish Harami CrossThe following are the general considerations and scenrio for trading the bearish harami cross candlestick.
▶ Trade Entry: Formation of bearish harami cross during an uptrend is taken as a sign of reversal, that is - the market prices are expected to go down in near future. So traders try to take a short sell position at or around the high price of the bearish harami cross candle (the baby candle). However, a few traders may like to wait for the confirmation candle to form, their selling price may be lower as the trend made the move which took the prices downwards. That's the tradeoff one needs to accept if waiting for a confirmation candle.
▶ Stop-loss Limit: The stop-loss varies from trader to trader based on their individual trade preferences, but usually while going long they set the stop-loss at 2-3 units below the low price of the bearish harami cross baby candle. Others who enter at a higher price should adjust the stop-loss proportionatly.
▶ Profit-levels: While active trading at short intervals, traders must follow a risk-reward ratio to determine the possible profit level from their bearish harami cross pattern trading. For instance, if the stop-loss limit is set at $1 (the maximum loss one is willing to take on a trade) and the risk-reward ratio one follows is 1/2, then one must take profits when it hits $2. If the risk-reward ratio being followed is 1/3, then one must aim for profits when the price hits a level that generated $3 for every $1 stop-loss set.
▶ Market Conditions: Since the formation of the bearish harami cross candle pattern formation is rare in the stock market, there is no set list of parameters which can guarantee the formation of this candlestick. Along with the above mentioned bearish harami cross formation requirement, traders should ensure that their selected price range, bands or trend-line limits are getting breached with large moves of the second bearish (and subsequent) candle. This ensures higher success rate of profitability. Additionally, one may take some liberty in defining the doji. Ideally, a doji candle should be of zero length, but a small-size of body is acceptable to be considered as a doji candle. The same applies to the baby candle of the bearish harami cross pattern formation. Although one must note that trading on technical analysis like candlestick patterns has limited success rate, so following strict stop-loss, disciplined trading and efficient capital management is advised.
Example of Bearish Harami Cross CandlestickThe following chart shows an instance of bearish harami cross candlesticks and the uptrend that followed shortly after:
As one can observe, the formation of the bearish harami cross candle reversed the uptrend that preceded the first red candle, and led to a downward move indicated by the long red arrow. Though the trend reversal was not confirmed by another long red candle which was expected to be formed immediately after the formation of the bearish harami cross candle, there was another small-sized green-colored doji which again acted as a confirmation signal. Additionally, there was a range breakout with large value which added to the possibility of the price reversal.
Traders usually set their profit targets and stop-loss levels based on the risk-reward ratio of their choice as mentioned in the previous section.
Latest Bearish Harami Cross FormationsFKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming bearish harami cross candles is updated on a daily basis. At present, the following are three examples - one each from stocks, ETFs and indexes - which have formed the bearish harami crosss as of the mentioned date (in reverse chronological order):
1) On Thursday, Jan 16, 2020, the stock price of Consumer Services sector based The Walt Disney Company (DIS) formed the following Bearish Harami Cross Candlestick pattern:
|Today to Previous Day's Body Length Factor:||0.02|
|$144.32||$145.12 ~= $145.09|
See full details and past history of Bearish Harami Cross Candlesticks for Walt Disney (DIS)
▶ Full list of stocks which most recently formed the Bearish Harami Cross Pattern
2) On Monday, Feb 10, 2020, the price of Bank Loans based Invesco Senior Loan ETF (BKLN) ETF formed the following Bearish Harami Cross Candlestick pattern:
|Today to Previous Day's Body Length Factor:||0.02|
|$22.59||$22.62 ~= $22.61|
See full details and past history of Bearish Harami Cross Candlesticks for Invesco Senior Loan ETF (BKLN)
▶ Full list of ETFs which most recently formed the Bearish Harami Cross Pattern
▶ Full list of Market Indexes which most recently formed the Bearish Harami Cross Pattern
...and there's more. FKnol.com everyday checks the stock price and candlestick formation across hundreds of stocks, ETFs and indexes to look for bearish harami cross formations. Please see the full list of recent bearish harami cross formations for:
▶ Full list of recent Bearish Harami Cross Stocks
▶ Full list of recent Bearish Harami Cross ETFs
▶ Full list of recent Bearish Harami Cross Indexes
The Bottom LineTrading candlesticks like the bearish harami cross needs strict discipline and emotion-free trading. Candlestick trading is a part of technical analysis and success rate may vary depending upon the type of stock selected and the overall market conditions. Use of proper stop-loss, profit level and capital management is advised.
One can also explore the similar candlestick formations on various dates using the below screener:
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