Identification and study of Harami patternHarami is a two candlestick pattern where the first candle is longer in shape while the second one is completely engulfed by the first candle ie. second candle have size smaller than the body of first candle.First candle is referred as mother while second candle is called baby.
Harami can either be Bullish or Bearish reversal pattern as described below:
Bullish Harami :First candle in Bullish Harami is a long Bearish candle (red or black candle) while the second one can be of any color.As it is a Bullish pattern, you have to look for it at the time of downward trend or at the bottom of the graph.
Bearish Harami :First candle in this pattern is a long Bullish candle (green or white candle) and the second candle can exhibit any color.As it is a Bearish candlestick pattern , you are suggested to follow it when you see it at the top / at the time of upward trend.
First candle of Harami can also be a Maruboju type of candle.
Trading with HaramiFirst thing you should notice while trading is the behaviour of the third candle . Observing third candle for confirmation is always a good choice rather trading just after observing the formation of any candlestick pattern.
In the case of a Bearish Harami ,it is good if third candle is bearish and even more preferable if it open Gapped down and you can trade when it crosses the lowest point of first candle , also it should close below the lower point of the first candle .You can set the stop-loss can be set at the highest price of first candle.
If it is a Bullish Harami , for confirmation you should look for third candle to be bullish and Gap up open to be more precise and you can trade( buy the stock or any other security) if it crosses the highest point of first candle.Stop-loss can be set at the lowest price of the first candle.
Volume indicator can also be a great help, volume of second candlestick should be greater than the volume traded for first candle. But there are many cases when volume traded shows reverse trend but harami worked properally. so, it's all on you to take the decision accordingally.
There is an another variation available in this candlestick pattern known to be as Harami cross, it is named so because baby in this pattern is a doji. and yes, it can also have its mother to be a marubozu.