What is a Harami cross?
A harami cross is a Japanese candlestick pattern that consists of a large candlestick that moves in the direction of the trend, followed by a small doji candlestick. The doji is completely contained in the body of the previous candlestick. The harami crossover pattern suggests that the previous trend may be about to reverse. The pattern can be bullish or bearish. The upward trend signals a possible upward price reversal, while the downward trend signals a possible downward price reversal.
Understanding the Harami cross
A bullish cross harami pattern forms after a downtrend. The first candlestick is a long down candle (usually black or red in color) which indicates that the sellers are in control. The second candle, the doji, has a narrow range and opens above the closure of the previous day. The doji candlestick closes near the price at which it opened. The doji must be completely contained with the real body of the previous candle.
The doji shows that a certain indecision has entered the minds of sellers. Typically, traders do not act on the model, unless the price continues to rise in the next two candles. This is called confirmation. Sometimes the price can stop a few candles after the doji, then go up or down. A rise above the opening of the first candle confirms that the price could go up.
A bearish harami forms after an uptrend. The first candlestick is a long candle (usually white or green in color) that shows that buyers are in control. This is followed by a doji, which shows indecision on the part of buyers. Again, the doji must be contained in the actual body of the previous candle.
If the price drops depending on the model, this confirms the model. If the price continues to rise after the doji, the bearish pattern is invalidated.
Key points to remember
- A bullish harami cross is a large down candle followed by a doji. This occurs during a downward trend.
- The harami bullish crossover is confirmed by an increase in prices depending on the model.
- A bearish harami cross is a large candle mounted followed by a doji. It occurs during an uptrend.
- The bearish model is confirmed by a fall in prices depending on the model.
Harami Cross Enhancers
For a bullish harami cross, some traders can act on the model as it is formed, while others will wait for confirmation. Confirmation is a price increase depending on the model. In addition to confirmation, traders can also give more weight or importance to a bullish harami cross if it occurs at a major support level. If this is the case, the price is more likely to go up, especially if there is no resistance nearby.
Traders can also observe other technical indicators, such as the Relative Strength Index (RSI) rising from the oversold territory, or confirmation of an upward movement against other indicators.
For a bearish harami cross, some traders prefer to wait for the price to fall lower by following the model before acting. In addition, the pattern may be more significant if it occurs near a major resistance level. Other technical indicators, such as an RSI moving lower relative to the overbought territory, could help confirm the downward price movement.
Swap the Harami Cross motif
There is no need to exchange the harami cross. Some traders simply use it as an alert to be on the lookout for a rollover. If it is already long, a trader can take profit if a bearish harami cross appears and the price begins to fall after the model. Or, a trader in the short position may seek to exit if a bullish harami cross occurs and the price begins to rise soon after.
Some traders may choose to enter positions once the harami cross appears. If you enter for a long time on a bullish harami cross, a stop loss can be placed below the bottom of the doji or below the bottom of the first candlestick. One possible place to enter along is when the price moves above the opening of the first candle.
If you are entering shorts, a stop loss can be placed above the top of the doji or above the top of the first candle. One possible place to enter the trade is when the price drops below the first open candle.
Harami cross patterns do not have profit objectives. Therefore, traders must use another method to determine when to quit a profitable trade. Some options include using a trailing stop loss, finding an exit with Fibonacci extensions or retracements, or using a risk / reward ratio.
Example of a Harami cross
The following graph shows a bearish harami cross in American Airlines Group Inc. (AAL). The price had fallen in an overall downward trend, but then flattened within a wide range. The price moved higher in a resistance zone where it formed a bearish harami pattern. Depending on the model, the price has dropped. This provided confirmation and an opportunity to exit long positions or take short positions.
The price continued to fall for a few weeks before reversing and then exceeding the resistance level.