Buying Harami Inside Bar Breakouts

One of the better trading strategies for beginners are volatility breakouts. There are three reasons why they’re good.

Firstly, you can place a tight stop, therefore reducing risk.

Secondly, the range expansion that comes on a successful breakout can be huge, compared to the risk taken.

Thirdly, they occur regularly on all markets.

The low volatility to high volatility cycle is one of the more predictable cycle in the market, and dare I say it the most profitable.

There are a number of ways to trade volatility breakouts. Read on, and I’ll explain my favourite, something I’ve called the Harami Inside Bar.

 

The standard inside bar

An inside bar is a very common two-bar pattern occurring on most markets and timeframes.

In this pattern, the most recently closed bar has a lower high and a higher low than the previous, or mother bar.

Standard inside bars are useful for trading, but the effectiveness of the pattern increases dramatically when a harami is present within the pattern.

The Harami Inside Bar

A harami occurs when the real body of a price bar, is fully contained within the real body of the previous bar. If you want to know more about harami patterns then read this post.

With the Harami Inside Bar, there are two criteria needed:

  1. the inside bar
  2. the harami

This can be seen in the diagram below.

What Is A Harami Inside Bar?

 

Why it works

The volatility cycle is the most important cycle in the market – low volatility begets high volatility. It’s a cycle that’s repeated across all markets and timeframes.

The Harami Inside Bar is a great way of representing this reduction in market volatility.

On a much lower timeframe, HIBs are usually triangle or wedge patterns.

Triangles and wedges are traditional chart patterns with a high degree of accuracy.

In these patterns, trendlines are drawn connecting lower highs and higher lows, until the very apex of the pattern, price volatility spikes in one direction, often violently.

The Harami Inside Bar is really just another way of representing a triangle or wedge, but on a higher timeframe, and without the need to draw trendlines on the upper and lower boundaries.

 

Harami Inside Bar trading rules

  1. The latest bar must have a lower high and a higher low than the previous bar
  2. The latest bar must have an open to close (real body) contained within the open to close (read body) of the previous bar
  3. Place a buy stop order two pips above the high of the latest bar
  4. Place a stop loss at the low of the latest bar
  5. If not triggered within one bar cancel the order

Harami Inside Bar Long Entry

Trailing stops

Once in a trade, it’s vital to know when to get out.

There are many exit techniques for a trader to choose from.

But the one I’ve found most effective for short-term trading is trailing a stop at the low of the latest bar when long. Or, trailing it the latest high if short.

This gives you the juice of any significant price move but will also have you taking profits at the first sign of trouble.

Looking at the visual below, you can see in action how this works.

Harami Inside Bar Trailing Stop

Final thoughts

Harami Inside Bars signal potential explosions in price. The setup is a double whammy in constricting price volatility.

Reduced volatility in high and low prices, the inside bar

But also, reduced volatility in open to close prices, the harami.

Added together they make can make a potent mix.

This system works well on 8-hour, daily and weekly price charts.

They’re easy to recognise, simple to trade and are therefore are an ideal strategy for the neophyte trader.

 

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John Scott
John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.
Posted in Technical Analysis.

John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.

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Tom
Tom
4 months ago

Hi John,
Great article. I can see you have described the HIB breakout as a long setup. Do you also implement this strategy for short positions?
Thanks,

Tom
Tom
4 months ago
Reply to  John Scott

Thanks John, really appreciate your advice and this website is fantastic. With the sheer volume of information on the internet regarding trading, it’s an absolute minefield. It’s very easy to spend hours/days learning one thing, only to find another source that contradicts it completely. Your style of trading really resonates with me & I will be following your blog from here on out.
Thanks again,
Tom

Felix Diez
3 months ago
Reply to  John Scott

Hi John,
just to clarify… do you apply the tagging or touching SMA rule only when price is on the ‘wrong side’ of SMA or for all entries up or down? In other words if I want to be long and price is above SMA without any of those 2 bars touching SMA, do I still enter?

I am a complete neophyte and found your site through your (very helpful) posts on Babypips. I am very interested in putting your strategies through paper testing. Many thanks for doing this.

Felix Diez
3 months ago

Got it. You answer my question precisely even though I formulated it awkwardly. Big thanks.

Another one if I may: I suspect with these simple strategies and SL trailing tight that you do not scale out to secure some early profit, but keep the whole postion until taken out. Is that right?

Felix Diez
3 months ago

Tought so. Thanks again and all the best. Your approach to ‘nursing’ neophytes is commandable, I will keep on paying interest to your advice and of course testing the hell out of it to find out how it suits me! Be well.

Phill
Phill
10 days ago

Hi John, I just wanted to jump in and also thank you for your brilliant website. I too discovered it through your really helpful comments over at BabyPips. I just have a quick query if I may; will you open positions across any number of markets if they give the signal, even if there is a strong correlation between them? If not, how do you determine which market has the strongest signal (or most probable setup). For instance, if a Harami inside bar forms on both the GBP/JPY and GBP/USD, would you take both positions or would you pick just… Read more »

Phill
Phill
9 days ago
Reply to  John Scott

Hi John

Yes, that does help!

Many thanks,
Phill