Market Trend Reversal Using Bearish Harami Pattern

Candlestick charts are widely used by analysts and traders to understand market movements, both short-term and long-term. Different types of candlestick graphs are popular today, but it was initially developed in Japan during the 17^th century. Japanese rice traders started using technical analysis to understand price movement in rice trading business. The credit for developing the modern candlestick charts goes to Homma, a renowned rice trader from Sakata, in 1850.

To build a candlestick chart, you’ll need a data set with open, high, low, and close values. Each candlestick has three parts – the thick middle part or body, a long thin line at the top, and a long thin line at the bottom, representing respectively high and low values. These are also called wicks of a candle. Since candlestick patterns became popular in the western world in 1991, several types of candlestick patterns have evolved. They have unique names like three black crows, morning start, two black gapping, and more, widely used to identify market fluctuation.  Bearish Harami candlestick charts are one such pattern used to identify bearish impetus. Harami in Japanese means ‘pregnant’, refers to the typical characteristic of the graph – that consists of two candlesticks to represent one group of data.

Now, let’s try and understand in detail the Bearish Harami pattern.

It usually forms at the end of a resistance period or an uptrend and indicates when uncertainty enters the market. It occurs when a large bullish candle is followed by a smaller red/blue candlestick. An important thing to notice in Bearish Harami trend is that the price fall creating a gap (window, as they are called in Japanese) on day two can’t move back to the higher closing price of day 1.

Day 1 – represented by Bullish green candlestick

Day 2 – small Bearish candle is formed, shown in green

How to identify a bearish candle in a chart

The two key parameters to identify Bearish Harami candlestick patterns are,

• Day 2 opens at a lower price than the closing price of day 1
• Closing price of day 2 is higher than the opening price of day 1

A bearish pattern signals a trend reversal or end of a bullish run. The size and position of the formation will reveal more about its magnitude, but it must be viewed together with other technical indicators to identify strong signals.

Bearish Harami throws off warning signs, allows traders to take precautions against changing market trends.

How to identify a Bearish Harami pattern within a trend

• Identify an existing upward trend in the market
• Look for signals showing slowing market momentum or gradual decline
• The size of a bearish red candle is no more than 25 percent of the large bullish candle
• Bearish Harami is followed by more bearish candles, indicating a trend reversal
• Confirm your opinion by comparing it with other indicators

Factors that trigger it

Some market factors have more influence in triggering Bearish Harami than other factors. These are,

• Negative news about a company or stock
• Regulatory changes that can impact future market performance and earnings
• Negative new regarding a country’s economy or sector
• Collective negative sentiment of investors and traders

Summary

Like mentioned earlier, Bearish Harami candlestick warns investors when a market takes a bearish turn.  Traders observe bearish trends in a market to identify potential entry points and subsequent profit opportunities. However, if consulted alone, it isn’t a reliable tool to confirm that there is a bearish turn in the market. Its result needs to be confirmed using two or more technical tools.