Bearish Harami Candlestick Trading Tutorial and Example
The bearish harami candlestick pattern is a common formation on the price charts of stocks, ETFs and stock market indexes. When formed during an uptrend, it gains significance as it indicates that the price may be about to reverse the direction and go down. It is taken as a possible indication to go short, hence the name includes 'bearish'. However, traders must note that bearish harami formation is not considered to be a very strong signal, and requires a confirmation which is fulfilled by formation of the next candle which should be red, that is bearish, candle. Since it is a two line pattern, which may need a further third candle as confirmation, good enough patience is required to trade on the formation of such candlestick pattern. This article explains the details of how the bearish candlestick is formed, what market conditions are indicated by its formation, how to trade the bearish candlestick, and covers the most recent examples of the same. To understand the working and trading of the bearish harami candlestick, let's start by checking the factors needed for its formation.
Construction of the Bearish Harami CandlestickThe bearish harami candlestick is formed by two adjacent candles. The first candle is a large-sized green-colored bullish candle which is a part of an uptrend. After such a green candle, one may observe that a small-sized bearish red candle is formed. These two candles formed during an uptrend constitute the bearish harami pattern.
This second red candle can even be a doji candle which has zero or very little body length, but the first green candle must be long enough such that it 'engulfs' the next red candle completely. Since this first candle needs to haram the second one, it cannot be a doji candle. When analysing the bearish harami pattern, one must focus only on the body lengths of the two candles which is formed by open and close prices only. The lengths of the wicks (also called candle shadows) may not have any significance.
Candlestick patterns for stock price analysis emerged in Japan, and the word 'Harami' in Japanses language means 'pregnant'. A look at this bearish harami pattern formed by the two candles represents a woman carrying a baby, hence the name. The green-colored long candle is often called the 'mother candle', while the red-colored short candle is often called the 'baby candle'.
The body of the second candle should lies somewhere in the upper part of the first candle.
The next requirement for a reliable bearish harami pattern is that it should form during an established uptrend. Formation of a large red-colored bearish candle indicates that the price reversal is possible, and the trend of the green-colored candles is expected to come to an end. Since the bearish harami is considered to be a weak signal, many traders wait for a confirmation candle to form which should also be red in color. If that happens, it further confirms the premise that uptrend has ended and the downtrend has gained momentum. Its time to go short on the stock, or cut the losses if already holding a long position. This is how a typical bearish harami candlestick appears:
Trading the Bearish Harami CandlestickWhile the formation of bearish harami is frequent on the price charts of all kinds of assets - be it stocks, indexes or exchange-traded funds (ETFs), its trading needs to be done in a cautious manner. Let's understand what leads to its formation - that is, the forces behind the market. An uptrend preceeds the bearish harami, which means the bulls (buyers) have been in control and have been pushing the prices higher and higher. Then, the bearish harami occurs which indicates that the bulls are getting tired and the sellers (bears) are now getting stronger in the market. Since the second candle of the harami pattern is smaller, it is not yet a concrete signal that sellers are in full control, but is indicative of the sellers have now started to outbid the buyers. That's the reason a third confirmation candle is required to be absolutely sure that the bearish pattern is set in motion and may continue for some time.
The formation of the red-colored confirmation candle further supports the bears taking to the driving wheel of the prices, and are pulling down the prices. Hence, its time to go short - that is, sell the stock, or cut the losses if holding a long position.
Bearish harami candle gains significance when formed during the uptrend. The formation sets the tone for a potential reversal after a long uptrend in the stock prices.
Additionally, traders may also look for the location of bearish harami pattern formation. The lower the first green-candle is placed compared to the red-candle's body, the stronger the reversal signal. Traders enter the trade when the bearish harami 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 red candlestick, the stronger the reversal pattern. If the bearish harami 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 often leads to continuation of the existing trend instead of a reversal.
Trading Scenario for Bearish HaramiHere are the general considerations and scenrio for trading the bearish harami candlestick.
▶ Trade Entry: Formation of bearish harami 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 position at or around the high price of the bearish harami candle (the baby candle). However, as many traders like to wait for the confirmation candle to form, the sell price may be lower as the trend has already kicked in taking the prices downward. That's the tradeoff one needs to accomodate for.
▶ 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 above the high price of the bearish harami candle. Others who enter at a lower price may like to adjust the stop-loss accordingly.
▶ 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 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: More volatile stocks with high beta values often tend to have high occurrences of bearish harami formations. Therefore, suitable selection of stocks/ ETFs / indexes is important while taking on bearish harami-based trading. Along with the above mentioned bearish harami 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. 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 CandlestickThe following chart shows an instance of bearish harami candlesticks and the uptrend that followed shortly after:
As one can observe, the formation of the bearish harami candle reversed the uptrend that preceded the first green candle, and led to a downward move indicated by the long red arrow. The trend reversal was also confirmed by another red candle which formed immediately after the formation of the bearish harami candle.
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 FormationsFKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming bearish harami 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 haramis as of the mentioned date (in reverse chronological order):
1) On Wednesday, Oct 21, 2020, the stock price of Energy sector based Marathon Oil Corp. (MRO) formed the following Bearish Harami Candlestick pattern:
|Today to Previous Day's Body Length Factor:||0.07|
See full details and past history of Bearish Harami Candlesticks for Marathon Oil (MRO)
▶ Full list of stocks which most recently formed the Bearish Harami Pattern
2) On Wednesday, Oct 21, 2020, the price of Large-Cap based iShares MSCI Hong Kong ETF (EWH) ETF formed the following Bearish Harami Candlestick pattern:
|Today to Previous Day's Body Length Factor:||0.14|
See full details and past history of Bearish Harami Candlesticks for iShares MSCI Hong Kong ETF (EWH)
▶ Full list of ETFs which most recently formed the Bearish Harami Pattern
3) On Friday, Oct 16, 2020, the value of popularly tracked leading stock market index Russell 2000 (RUT) formed the following Bearish Harami Candlestick pattern:
|Today to Previous Day's Body Length Factor:||0.23|
See full details and past history of Bearish Harami Candlesticks for Russell 2000 (RUT)
▶ Full list of Market Indexes which most recently formed the Bearish Harami 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 formations. Please see the full list of recent bearish harami formations for:
▶ Full list of recent Bearish Harami Stocks
▶ Full list of recent Bearish Harami ETFs
▶ Full list of recent Bearish Harami Indexes
The Bottom LineTrading candlesticks like the bearish harami 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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