Bullish Harami Candlestick Trading Tutorial and Example
The bullish harami candlestick pattern is a common formation on the price charts of stocks, ETFs and stock market indexes. When formed during a downtrend, it gains significance as it indicates that the price may be about to reverse the direction and go up. It is taken as a possible indication to go long that is - buy the stock), hence the candlestick pattern name includes 'bullish'. However, traders must note that bullish harami formation is not considered to be a very strong signal, and requires a confirmation which is achieved by observing the formation of the next candle. This confirmation candle should be green in color or a bullish candle. Since it is a two line pattern, which may need a further third candle as confirmation, a good level of patience is required to trade on the formation of such candlestick pattern. This article explains the details of how the bullish harami candlestick is formed, what market conditions are indicated by its formation, how to trade the bullish harami candlestick, and the article also covers the most recent examples of the same. To understand the working and trading of the bullish harami candlestick, let's start by checking the factors needed for its formation.
Construction of the Bullish Harami CandlestickThe bullish harami 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, one may observe that a small-sized green-colored bullish candle is formed. These two candles formed back-to-back during a downtrend constitute the bullish harami pattern.
This second green candle can even be a doji candle which has zero or very little body length, but the first red candle must be long enough such that it 'engulfs' the next smaller green candle completely. Since this first candle needs to engulf the later one, it cannot be a doji candle. When analysing the bullish harami pattern, one must focus only on the body lengths of the two candles which is formed by open and close prices and ignore the high and low prices which form the wicks of the candle. 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 bullish harami 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 green-colored bullish short candle is often called the 'baby candle'.
The body of the second candle should lies somewhere in the lower half of the first candle.
The next requirement for a reliable bullish harami pattern is that it should form during an established downtrend. Formation of a large green-colored bullish candle indicates that the price reversal is possible, and the ongoing trend of the red-colored candles is expected to come to an end. Since the bullish harami is considered to be a weak signal, many traders wait for a confirmation candle to form which should also be green in color. If that happens, 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 candlestick appears:
Trading the Bullish Harami CandlestickWhile the formation of bullish 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. A bullish harami is preceeded by a downtrend, which indicates the bears (sellers) were been in charge of driving the prices to the bottom. Then, the bullish harami gets formed during this downtrend which indicates that the bears are getting overwhelmed by the buyers (bulls) who are returning to the market with high demand, and hence getting stronger and pushing up the prices. However, since the second candle of the harami pattern is smaller, it is not yet a concrete signal that sellers are in full control, though it is indicative of the buyers have now started to outshine the sellers. That's the reason a third confirmation candle is required to be absolutely sure that the bullish pattern is now initiated and has a good chance that it may continue for some time.
The formation of the green-colored confirmation candle further supports the buyers taking to the driving wheel of the prices, and are pushing up the prices. Hence, its time to go long - that is, buy the stock, or cut the losses if holding a short position.
Bullish harami candle gains significance when formed during the downtrend. The formation sets the tone for a potential reversal after a long downard move in the stock prices.
Additionally, traders may also look for the location of bullish harami pattern formation. The lower the first red-candle is placed compared to the green-candle's body, the stronger the reversal signal. Traders enter the trade when the bullish harami 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 green candlestick, the stronger the reversal pattern. If the bullish 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 bullish harami often leads to continuation of the existing trend instead of a reversal.
Trading Scenario for Bullish HaramiHere are the general considerations and scenrio for trading the bullish harami candlestick.
▶ Trade Entry: Formation of bullish harami during a downtrend 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 long position at or around the low price of the bullish harami candle (the baby candle). However, as many traders 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 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 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 bullish harami formations. Therefore, suitable selection of stocks/ ETFs / indexes is important while taking on bullish harami-based trading. Along with the above mentioned bullish 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 Bullish Harami CandlestickThe following chart shows an instance of bullish harami candlesticks and the uptrend that followed shortly after:
The above chart is of Amazon.com Inc. (AMZN) stock price candlestick patterns forming bullish harami on 03-Jun-2019. As one can observe, the formation of the bullish harami 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 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 Bullish Harami FormationsFKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming bullish 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 bullish haramis as of the mentioned date (in reverse chronological order):
1) On Friday, Oct 23, 2020, the stock price of Technology sector based Salesforce.com (CRM) formed the following Bullish Harami Candlestick pattern:
|Today to Previous Day's Body Length Factor:||0.10|
See full details and past history of Bullish Harami Candlesticks for Salesforce (CRM)
▶ Full list of stocks which most recently formed the Bullish Harami Pattern
2) On Friday, Oct 23, 2020, the price of Real Estate-Broad based Real Estate Select Sector SPDR Fund (XLRE) ETF formed the following Bullish Harami Candlestick pattern:
|Today to Previous Day's Body Length Factor:||0.38|
See full details and past history of Bullish Harami Candlesticks for Real Estate Select Sector SPDR Fund (XLRE)
▶ Full list of ETFs which most recently formed the Bullish Harami Pattern
3) On Friday, Oct 23, 2020, the value of popularly tracked leading stock market index NASDAQ 100 (NDX) formed the following Bullish Harami Candlestick pattern:
|Today to Previous Day's Body Length Factor:||0.24|
See full details and past history of Bullish Harami Candlesticks for NASDAQ 100 (NDX)
▶ Full list of Market Indexes which most recently formed the Bullish 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 bullish harami formations. Please see the full list of recent bullish harami formations for:
▶ Full list of recent Bullish Harami Stocks
▶ Full list of recent Bullish Harami ETFs
▶ Full list of recent Bullish Harami Indexes
The Bottom LineTrading candlesticks like the bullish 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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