The Harami Pattern

The harami is a potent candlestick pattern, and it’s presence often leads to dramatic price moves. However, it is also an under utilised pattern and for many traders, it’s presence is not given the credit it deserves.

This article explains what the harami is, and why it’s so special. For Simple Pattern Traders like myself, it can be a very useful trading tool.

 

What is it?

In Japan ‘harami’ means pregnant women. It is an apt term for the structure of this pattern.

Because it actually shows a small one bar price structure (the unborn baby) within a larger one bar structure, the mother.

If this concept seems familiar it is.

It’s very much like the Inside Bar, where there’s a smaller Inside Bar contained within a larger Mother Bar.

The harami pattern is similar.

Only, where the inside bar concerns itself with high and low price data, the harami concerns itself with open and close price data

It is this, the consolidation of open and close data, that where the true potency of this pattern lies.

Look at the diagram below for some examples of harami patterns.

The larger body is the mother bar, the small the child bar.

Four examples of Harami patterns

Why are they a good predictor of large price moves?

The most important price of any bar is always the closing price.

The second most important price of any bar is the opening price.

This may be up for debate in some quarters of the trading community, as many traders plot low price data in uptrends and high price points in downtrends.

But it’s generally recognised that dumb money enters the market at the open, and the smart money at the close.

The harami displays the reduced market volatility in the two most important data points of any price bar.

 

The harami price action combo

Despite their potency, simply entering the market the next time you see one is not the way to trade them.

There are actually many times harami patterns lead to nothing of importance.

Their effectiveness only becomes apparent when combined with standard Price Action setups such as the Inside Bar or Pin Bar.

 

Keeping you out of choppy markets

Using the harami as a trade filter keeps you out of inferior Price Action trades.

Not all standard Pin bars or Inside Bars are optimal setups. Often they are nothing but market noise disguised as a tradeable edge.

During very choppy sideways markets, price bars tend to be characterised with long upper and lower shadows, with tiny real bodies.

In this environment, it’s easy for Pin bars and Inside Bars to form but they are rarely tradeable and lead so sub-par gains.

Taking only Harami Inside Bars and Harami Pin Bars reduces the failure rate and also increase the reward much of the time.

 

Simple Pattern Trading and the harami

In Simple Pattern Trading as discussed on this site, I don’t use confirmatory analysis.

And it’s because of this, the harami price pattern is so important.

Combining price action with more traditional technical tools is a legitimate way to trade.

However, I don’t think it is the optimal one for beginners.

The more indicators, trendlines, Fibonacci levels, horizontal support and resistance added to your entry the more chance of decision fatigue.

This is particularly the case for beginners, who are trying to grasp so many things at once.

It can lead to stress, confusion or becoming overwhelmed.

And this becomes almost a given when your own hard-earned money is on the line.

This is why I always say to beginners, make your systems as simple as possible.

It’s better to use the vital few methods that work well rather than the trivial many that don’t

The harami pattern is one of those vital few tools that new traders need to be looking at to increase the quality of their setups.

 

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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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