Bullish Harami Cross Candlestick Trading Tutorial and Example
The bullish harami cross candlestick pattern is a rare but very strong formation on the price charts of stocks, ETFs and other popular market indexes. When formed during a downtrend, it indicates that the price is about to reverse the direction and has a high probability to go up. It is taken as a very strong indication to go long that is - to buy the stock, hence the candlestick pattern name includes 'bullish'. Compared to the frequently forming bullish harami pattern, the bullish harami cross is considered to be a very strong signal. While some traders may wait for a confirmation, the experienced ones may enter a trade on the formation of the bullish harami cross pattern. This article explains the details of how the bullish harami cross candlestick is formed, what market conditions are indicated by its formation, how to trade the bullish harami cross candlestick, and the article also covers the most recent examples of the same. To understand the working and trading of the bullish harami cross candlestick, let's start by checking the factors needed for its formation.
Construction of the Bullish Harami Cross CandlestickThe bullish harami cross candlestick is formed by two adjacent candles. The first candle is a large-sized red-colored bearish candle which is a part of an ongoing downtrend. After such a bearish candle, formation of a zero-body doji candle confirms the formation of the bullish harami cross. A doji candle does not have a body which is constituted by open and close prices. 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 distant to each other.
Formation of two such candles back-to-back during a downtrend constitute the bullish harami cross pattern.
The size or color of the second doji candle does not matter, but the first red candle must be long enough such that it 'engulfs' the next doji candle completely. Since this first candle needs to engulf the second one, it cannot be a doji candle. Analysis of the bullish harami cross pattern must be limited to the body lengths of the two candles which is formed by open and close prices. The shadows or wicks can be ignored which are formed by the high and low prices.
Emerging in Japan, the names of the candlestick patterns for stock price analysis are often taken from the Japanese language. The word 'Harami' in Japanses language means 'pregnant'. A look at this bullish 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 bullish harami cross pattern is that it should form during an ongoing downward price move. Formation of a doji candle indicates that the price reversal is possible, and the ongoing trend of the red-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 green colored confirmation candle is formed, it further confirms the premise that the downtrend has ended and the uptrend has gained momentum. Its time to go long on the stock (buy), or cut the losses if already holding a short position. This is how a typical bullish harami cross candlestick appears:
Trading the Bullish Harami Cross CandlestickWhile the formation of bullish harami cross is not that regular on the price charts of all kinds of assets (stocks, indexes or exchange-traded funds), its infrequent formation is considered a strong signal. Let's understand what leads to its formation - that is, the drivers in the market that form the bullish harami cross.
A bullish harami cross is preceeded by a downtrend, which indicates a complete dominance by the bears (sellers) as compared to the bulls (buyers). Next comes the formation of the doji as the second candle which completes the bullish harami cross pattern. It indicates that market is now entering an indecisive state, as the doji's basic feature is indecisiveness. The bulls are apparently getting back in action, and are now matching the bears so the doji is formed. The formation of the confirmation candle with a bullish tone then indicates that the buyers have overwhelmed the sellers, and an uptrend is going 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 buyers have returned to the market in full swing with high demand, and hence getting stronger and pushing up the prices. Therefore, its time to go long - that is, buy the stock, or cut the losses if holding a short position.
The bullish harami cross candle pattern gains significance when formed during the downtrend. The formation sets the tone for a potential reversal after a long downward move in the stock prices. Traders enter the trade when the bullish harami cross is formed at the lower 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 bullish 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 bullish harami cross often leads to continuation of the existing trend instead of a reversal.
Trading Scenario for Bullish Harami CrossThe following are the general considerations and scenrio for trading the bullish harami cross candlestick.
▶ Trade Entry: Formation of bullish harami cross during a downtrend is taken as a sign of reversal, that is - the market prices are expected to go up in near future. So traders try to take a long position at or around the low price of the bullish harami cross candle (the baby candle). However, a few traders may like to wait for the confirmation candle to form, the buy price may be higher as the trend has already kicked in taking the prices upwards. That's the tradeoff one needs to be ready 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 below the low price of the bullish 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 bullish 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 bullish harami cross candle pattern formation is rare, there is no set list of parameters which can guarantee the formation of this candlestick. Along with the above mentioned bullish 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 bullish 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 Bullish Harami Cross CandlestickThe following chart shows an instance of bullish harami cross candlesticks and the uptrend that followed shortly after:
As one can observe, the formation of the bullish harami cross candle reversed the uptrend that preceded the first red candle, and led to a upard move indicated by the long green arrow. The trend reversal was also confirmed by another red candle which formed immediately after the formation of the bullish harami cross candle. 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 Bullish Harami Cross FormationsFKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming bullish 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 bullish 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 Bullish Harami Cross Candlestick pattern:
|Today to Previous Day's Body Length Factor:||0.02|
|$145.12 ~= $145.09|
See full details and past history of Bullish Harami Cross Candlesticks for Walt Disney (DIS)
▶ Full list of stocks which most recently formed the Bullish Harami Cross Pattern
2) On Monday, Feb 10, 2020, the price of Bank Loans based Invesco Senior Loan ETF (BKLN) ETF formed the following Bullish Harami Cross Candlestick pattern:
|Today to Previous Day's Body Length Factor:||0.02|
|$22.62 ~= $22.61|
See full details and past history of Bullish Harami Cross Candlesticks for Invesco Senior Loan ETF (BKLN)
▶ Full list of ETFs which most recently formed the Bullish Harami Cross Pattern
▶ Full list of Market Indexes which most recently formed the Bullish 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 bullish harami cross formations. Please see the full list of recent bullish harami cross formations for:
▶ Full list of recent Bullish Harami Cross Stocks
▶ Full list of recent Bullish Harami Cross ETFs
▶ Full list of recent Bullish Harami Cross Indexes
The Bottom LineTrading candlesticks like the bullish 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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