The Bullish Harami candlestick pattern: another great forex trend reversal and continuation pattern…
Bullish Harami Pattern
SIGNAL: Bullish, Medium to Weak
This candlestick pattern consists of three individual forex candles:
Setup Candle: The first candle is bearish and preferably occurs at the end of a significant push down in price. This candle represents the final surge downwards 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 bullish candle that does not exceed the setup candle in terms of body length. The signal candle in other words closes below the open of the setup candle. In this respect this candlestick pattern is like a weakened form of the bullish engulfing pattern.
Confirmation Candle: the third candle continues to move upwards and closes above the open of the setup candle.
PSYCHOLOGY AND FUNDAMENTALS
The Bullish Harami pattern usually sets up at the end of a move down 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 down in price it signals the exhaustion of the supply of sellers and the drawing in to the market of buyers. At this stage buyers will be more inclined to enter the market on the offer of a currency pair at comparatively cheap levels. At the close of the signal candle the bull/bear struggle is left undecided, although it appears the bulls are making inroads on the bears positions. It takes the confirmation candle’s close above the open of the signal candle to confirm that the bulls are once more in control.
- The Bullish Harami can also occur in an uptrend when price temporarily retraces, preferably to a support level. This temporary move downwards may be due to buyers taking profit, sellers moving into the market at the relatively inflated prices, or just normal cyclical market exhaustion as the buy orders thin out. Hence, if price suddenly and sharply moves down to a level where buyers are ready to once more start moving into the market, price may be pushed up again.
TRADE ENTRY & STOP LOSS
You can enter either a Buy Stop order 2 to 5 pips in front of the highest price the confirmation candle reached, or if you are confident enough of the move up you can enter aggressively with an At Market order. Either way, your Stop should go 2 to 5 pips behind the lowest 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 lowest price of the setup and signal candles.
The larger the bullish candle that confirms the pattern, the more likely price will move up. 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 lows of the setup and signal candles. If there is a strong area of resistance only 20 pips above current price action, you may consider this to be a low probability trade and pass on the opportunity.
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