The Bearish Harami pattern: another great forex trend reversal and continuation pattern…
SIGNAL: Bearish, Medium to Weak
This Forex candle pattern consists of three individual forex candles:
Setup Candle: The first candle is bullish and preferably occurs at the end of a significant push up in price. This candle represents a final surge upwards in price. The setup candle should be considerably longer than the candles preceding it, i.e. it should exceed the average true range of the last several candles.
Signal Candle: the second candle is a bearish candle that does not exceed the setup candle in terms of body length. The signal candle in other words closes above the open of the setup candle. In this respect this candlestick pattern is like a weakened form of the bearish engulfing pattern.
Confirmation Candle: this candle continues to move downwards and closes below the open of the setup candle.
PSYCHOLOGY AND FUNDAMENTALS
The Bearish Harami pattern usually sets up at the end of a move up in price, whether that move is part of a long-term trend or a short term retracement. The two scenarios are:
- When it occurs at the end of a long run up in price it signals the exhaustion of the supply of buyers and the drawing in to the market of sellers. At this stage sellers will be more inclined to enter the market on the offer of a currency pair at comparatively elevated levels. At the close of the signal candle the bull/bear struggle is left undecided, although it appears the bears are making inroads on the bulls positions. It takes the confirmation candle’s close below the open of the signal candle to confirm that thebears are once more in control.
- The Bearish Harami can also occur in a downtrend when price temporarily retraces, preferably to aresistance level. This temporary move upwards may be due to sellers taking profit, buyers moving into the market at the relatively deflated prices, or just normal cyclical market exhaustion as the sell orders thin out. Hence, if price suddenly and sharply moves up to a level where sellers are ready to once more start moving into the market, price may be pushed down again.
TRADE ENTRY & STOP LOSS
You can enter either a Sell Stop order 2 to 5 pips in front of the lowest price the confirmation candle reached, or if you are confident enough of the move down you can enter aggressively with an At Market order. Either way, your Stop should go 2 to 5 pips behind the highest price of the setup and signal candles. This is a rough guide only: in volatile markets you may choose to extend the stop further out, and for much higher time frame charts such as the daily you may set stops 5 to 20 or even more pips behind the highest price of the setup and signal candles.
The larger the bearish candle that confirms the pattern, the more likely price will move down. However, if the confirmation candle is extremely long you may have trouble getting in with a reasonable reward to risk ratio.
For example, you may have to set a stop loss of 50 pips to set the stop comfortably behind the highs of the setup and signal candles. If there is a strong area of support only 20 pips below current price action, you may consider this to be a low probability trade and pass on the opportunity.
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