9 -The Concept of 'Harami Pattern'

You should know that the Hindi word Harami does not refer to the term Harami. It is actually the Japanese term for "pregnant". The candlestick formation will make you appreciate this word's intuitiveness.

Harami is a pattern that uses two candles. The first candle is typically long and the second has a smaller body. The second candle generally has a different colour from the first. Trend reversal can occur when the harami pattern is visible. There are two types harami patterns: the bullish and bearish.

9.1 -Let's Understand the 'Bullish harami' Pattern

The bullish harami pattern is located at the bottom of the chart. Similar to the engulfing, the bullish harami pattern develops over two days.

This is how a bullish-harami pattern is thought:

1. The market is currently in a downtrend, pushing prices lower. This gives the bears complete control over the markets.
2. Day 1 of the pattern (P1): A red candle with a new lowest level is formed. This reinforces the bear's position in market.
3. The market opens on day 2 (P2) at a higher price than the previous day's closing. The bears panic when they see a high opening price. They would have expected a lower price otherwise.
4. The market gains strength with P2 and closes on a positive note. This is a blue candle. The closing price of P2 is still below the open price for P1 in the previous days.
5. Within P1's long red candle,a small blue candle that apperas contained/pregnant which is created by the P2's price action.
6. Although the small, blue candle alone looks harmless, the real panic comes from the sudden appearance of the bullish candle when it is least expected.
7. The blue candle encourages bulls to take long positions, but it also unnerves bears.
8. It is expected that panic among the bears will spread quicker, giving more push to bulls. This can push prices higher.Investing in stock is always a good idea.

This is the trade setup for bullish harami:

1. It is important to take a long position on the bullish-harami formation.
2. Risk-takers may initiate long trades at the close of the P2 candle.
3. To confirm that P1 and P2 are forming a bullish-harami pattern, risk takers should validate the following conditions:
   1. The P2 opening should be greater than P1.
   2. The market price for P2 at 3:20 PM should be lower than the opening price.
   3. These conditions can be met and the pattern of bullish harami is formed by P1 and P2.
4. Ater P2 at the end of the day,a long trade can be initiated by the risk -averse,if the day is forming a blue candle is confirmed.
5. The stoploss for the trade will be the lowest low in the pattern.
    
6. These are the OHLC details:

   P1 - Close = 815, High = 874 and Low = 810.
   P2 - Close = 835, High = 847 and Low = 818.

   The risk-taker would open the long position at P2, which is approximately 835. The trade's stop loss would be the lower low price of P1 and P2, which is in this instance 810.

   If it is a blue day, the risk-averse trader will open the trade on the day close to the end of P2, which in this instance is.

   After the trade is initiated, the trader must wait for the stop loss or target to be reached before he/she can initiate the trade.
    

   9.2 - Let's understand the 'bearish Harami' Pattern

   The bearish-harami pattern is found at the top of an uptrend. This allows the trader the opportunity to open a short trade.
    

   Here's how to shorten a bearish Harami:

   1. The bulls are in complete control of the market's uptrend.
   2. The market trades higher on P1 and makes a new peak. It closes positively, forming a blue candle-day. Bulls are confirmed by the trading activity.
   3. The market suddenly opens lower on P2, displaces bulls and causes a little panic for bulls.
   4. The market trades lower and closes negatively, forming a red candle.
   5. Panic sets in and the bulls are forced to unwind their positions due to the unexpected negative market trend.
   6. It is expected that the negative drift will continue. Therefore, it is worth considering setting up a short-term trade.

   This is the trade setup for the bearish harami short trade:

   1. After ensuring that P1 and P2 are combined, the risk-taker will shorten the market close to P2, after which he or she will make a bearish Harami. Two conditions must be met to validate this:
      1. The P2 open price should be lower than P1.
      2. The P2 close price should be higher than the P1 open price.
   2. Risk-averse traders will shorten the market on the day following P2, after it has formed a red candle day.
   3. Stoploss is the highest value between P1 & P2.

   Here's a chart from IDFC Limited showing the bearish Harami. These are the details of OHLC:

   P1 - Close = 127, High = 128, Low = 129, Close = 127
   P2 - Close = 124.80, High = 126.19, Low = 129.70 and High = 126.9
    

   The trade will be initiated by the risk-taker on the second day, near the closing price at 125. Risk-averse traders will only initiate trades on days 2 and 3, after making sure it forms a red candle. The trade would have been avoided if the risk-averse had not followed the instructions.

   The highest value between P1 and 2 would be the stop loss. It would be 129.70 in this instance.

   Key points:

   1. The harami pattern develops over two trading sessions, P1 and P2.
   2. Day 1 (P1) forms a long candle, while day 2 (P2) forms a small candle that appears to have been hidden inside the long candle.
   3. At the lower end of a downtrend, a bullish harami candle pattern forms. P1 is a red candle and P2 a blue candle. A risk-averse trader will initiate a long position near P2's close (risk taker). If the blue candle forms, risk-averse traders won't initiate long trades until P2 ends.
   4. A bullish harami pattern has a stop loss at the lowest price of P1 to P2.
   5. At the top of an uptrend, the bearish harami is formed. P1 is a large blue candle and P2 a small red candle. It is possible to open a short trade at the close of P2 (risk-taker). Risk-averse traders will only initiate a short trade near the close of P2 (risk taker), after making sure it's a red candle day.
   6. A bearish harami is a pattern where the stop loss price is the highest between P1-P2.