The Harami (meaning "pregnant" in Japanese) Candlestick Pattern is a reversal pattern. The pattern consists of two Candlesticks:
- Larger Bullish or Bearish Candle (Day 1)
- Smaller Bullish or Bearish Candle (Day 2)
The Harami Pattern is considered either bullish or bearish based on the criteria below:
A bearish Harami occurs when there is a large bullish green candle on Day 1 followed by a smaller bearish or bullish candle on Day 2. The most important aspect of the bearish Harami is that prices gapped down on Day 2 and were unable to move higher back to the close of Day 1. This is a sign that uncertainty is entering the market.
In contrast, a bullish Harami occurs when there is a large bearish red candle on Day 1 followed by a smaller bearish or bullish candle on Day 2. Again, the most important aspect of the bullish Harami is that prices gapped up on Day 2 and price was held up and unable to move lower back to the bearish close of Day 1.
The chart below of the Nasdaq 100 E-mini Futures contract shows an example of both a bullish and bearish Harami candlestick pattern:
The first Harami pattern shown above on the chart of the E-mini Nasdaq 100 Future is a bullish reversal Harami. First there was a long bearish red candle. Second, the market gapped up at the open. In the case above, Day 2 was a bullish candlestick, which made the bullish Harami even more bullish.
A buy signal could be triggered when the day after the bullish Harami occured, price rose higher, closing above the downward resistance trend line. A bullish Harami pattern and a trend line break is a potent combination resulting in a strong buy signal.
The second Harami pattern shown above on the chart of the E-mini Nasdaq 100 Future is a bearish reversal Harami. The first candle was a long bullish green candle. On the second candle, the market gapped down at the open. The chart above of the e-mini shows that Day 2 was a bearish candlestick; this made the bearish Harami even more bearish.
A sell signal could be triggered when the day after the bearish Harami occured, price fell even further down, closing below the upward support trend line. When combined, a bearish Harami pattern and a trend line break is a strong indication to sell.
A Harami formation indicates loss of momentum and often warns of reversal after a strong trend. Harami means 'pregnant' which is quite descriptive. The second candlestick must be contained within the body of the first, though the shadows may protrude slightly.