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