How to Trade the Harami Reversal Candlestick Pattern in 2021.

What is the Harami Reversal Candlestick Pattern?

The Harami reversal candlestick pattern is a two-candlestick trend reversal setup.

Harami in Japanese means ‘pregnant’. It takes this name because it resembles an expectant mother.

The pattern is made of first the mother candlestick with a larger body, then the child with a smaller body.

The focus is usually on the bodies of the two candlesticks which make up the pattern.

The body of the baby must be entirely engulfed by the body of the mother bar preceding it.

Difference between a bullish and a bearish Harami pattern.

A bullish Harami reversal candlestick pattern is made up of first a long-bodied bearish bar, then a bullish short-bodied bar.

The body of the second bar must be entirely within the body of the first bar.

A bearish Harami reversal candlestick pattern, on the other hand, is made up of first a long-bodied bullish bar, then a bearish short-bodied bar.

The body of the second bar must also entirely be within the body of the first bar.

The Principle behind the Harami Reversal Candlestick Pattern.

The principle behind the Harami reversal candlestick pattern is simple.

Basically, the move from a long to a short body is significant of volatility contraction.

While the price was moving with a huge momentum in the direction of the trend, it experienced a sudden volatility contraction.

This must-have slowed down the price momentum in the direction of the trend, hence sounding a looming reversal of the incumbent trend.

Ideally, that’s the best summary of the Harami reversal candlestick pattern that you will find on the internet.

Note; the dynamism with which to trade the pattern has been changing from time to time.

In this post, I will show you how to trade the Harami reversal candlestick pattern in 2021. Saddle tight and let us explore this together.

Trading the Harami Reversal Candlestick Pattern in 2021.

1. Set Up the Indicators.

The only indicator required for this strategy is the Moving Average Convergence and Divergence (MACD).

I know you are wondering what MACD is doing here because you are not used to trading the Harami reversal candlestick pattern with the MACD.

Well, remember I am teaching you how to trade the Harami Reversal Candlestick in 2021, so new stuff is inevitable.

Click on the indicators’ tab and choose MACD from the list.

Apply it in its default settings and your chart will be ready for the next step.

Remember your chart must be in the Japanese candlestick form though.

2. Establish the Market Trend.

You must first know which direction the market is trending towards, in order to draw trend channels, which is the next step.

Use price action in this step to establish the market trend.

Price action is simply what the price is doing.

Is it forming higher highs, higher lows, lower lows, lower highs, or what exactly is the price doing?

If the price forms higher highs and higher lows, then it is trending upwards.

On the other hand, if the price forms lower highs and lower lows, it is then trending downwards.

The market may also be trending sideways.

This is where the market is neither trending upwards nor downwards but oscillates up and down within certain levels.

So which of the three cases is your market trending?

Take note of it, then proceed to the next step.

3. Draw Trend Channels.

The trend channels you draw in this step are with respect to the kind of market trend you established in the previous step.

In the previous step, there were three possible outcomes – upwards trending market, downwards trending market, or sideways trending market.

In this step, you will use trend and horizontal lines to draw the trend channels of the market trends.

Did you get an upwards trending market in step 2?

Then it means the market was forming higher highs and higher lows.

Use a trend line to join the major lows of the price and another trend line to join the major highs of the price.

You will get an upward sloping trend channel for the uptrend.

Did you, on the other hand, get a downwards trending market in step 2?

Then it means that the market was forming lower highs and lower lows.

Use a trend line to join the major highs of the price and another trend line to join the major lows of the price.

You will get a downwards sloping trend channel for the downtrend.

Well, was your market trending sideways?

Then it means that it was forming highs at almost the same level and lows at almost the same level.

That gives an impression that the rising price would reverse downwards at almost the same level almost every other time.

The falling price would also reverse upwards at almost the same level almost every other time.

In the above case, use a horizontal line to join the major highs of the price and another horizontal line to join the major lows of the price.

You will get a horizontal channel for the sideways trend.

4. Spot the Harami Reversal Candlestick Pattern.

Have you drawn the trend channels for the respective market trends?

If yes, then you can proceed to scan trading signals.

Trading signals in this case are the Harami reversal candlestick patterns.

Here are the specifications of the Harami reversal candlestick patterns you expect in relation to the trend channels:

• Upwards sloping trend channel on an uptrend: Towards the end of the uptrend, expect a bearish Harami reversal candlestick pattern at the upper limit of the channel.
• Downwards sloping trend channel on a downtrend: Towards the end of the downtrend, expect a bullish Harami reversal candlestick pattern at the lower limit of the channel.
• Horizontal trend channel on a sideways trend: At the upper limit of the channel, expect a bearish Harami reversal candlestick pattern. However, at the lower limit of the channel, expect a bullish Harami reversal candlestick pattern.

A reminder of how bullish and bearish Harami reversal candlestick patterns look like will do no harm, or will it?

Here you go:

• Bullish Harami reversal candlestick pattern: First, there must be a downtrend.

After the trend has been running for some time, a long-bodied bearish candlestick must appear, followed by a short-bodied bullish candlestick.

The body of the second candlestick of the pattern must be entirely within the body of the first candlestick.

• Bearish Harami reversal candlestick pattern: First, there must be an uptrend.

After the trend has been running for some time, a long-bodied bullish candlestick must appear, followed by a short-bodied bearish candlestick.

The body of the second candlestick of the pattern must be entirely within the body of the first candlestick.

5. Confirm the Signal with MACD.

Do you remember applying the MACD indicator on the chart as the very first step?

It was in this step where you would use the MACD indicator you applied on your chart.

Having a Harami reversal candlestick pattern signal is not enough.

You need further confirmation from an indicator.

Remember we have always said that candlestick patterns are not exhaustive on their own, so they cannot solely be used to make trading decisions.

They need to be used in conjunction with other trading tools such as indicators.

Here is how to confirm the Harami reversal candlestick pattern signals obtained from the previous step:

• Bearish Harami reversal candlestick pattern on the upper limit of the upwards sloping channel must be followed by a bearish MACD divergence.

A bearish MACD divergence is where the MACD will be forming lower highs as the price is forming higher highs.

• Bullish Harami reversal candlestick pattern on the lower limit of the downwards sloping channel must be followed by a bullish MACD divergence.

A bullish MACD divergence is where the MACD will be forming higher lows as the price forms lower lows.

• Bearish Harami reversal candlestick pattern on the upper limit of the horizontal channel should be followed by a bearish MACD divergence.
• Bullish Harami reversal candlestick pattern on the lower limit of the horizontal channel should be followed by a bullish MACD divergence.

6. Set Up Buy Stop or Sell Stop Pending Order.

Set up a buy stop pending order at the high of the second bar of a confirmed bullish Harami reversal candlestick pattern.

On the other hand, set up a sell stop pending order at the low of the second bar of a confirmed bearish Harami reversal candlestick pattern.

7. Adjust Stop Loss and Take Profit.

Place the Stop Loss for the buy order at the low of the bar on whose high you placed the buy order.

On the flip side, place the Stop Loss for the sell order at the high of the bar on whose low you placed the sell order.

Perfect Harami reversal candlestick patterns should show urgency in price move in the direction of the reversal.

The Take Profit for your orders needs to be at the opposite extreme of the channel.

Take the profit for your buy order just below the upper limit of the channel. For the sell order, take the profit just above the lower limit of the channel.

Also Read: – HOW TO SET UP AND TRADE THE ICHIMOKU KINKO HYO METHOD IN OLYMP TRADE.

Wrapping Up.

As we conclude, I would like to state that conditions may not perfectly occur as I have described.

The price might break beyond the drawn channel and create a seemingly parallel channel along the initial channel.

If that happens, you can introduce other trend lines parallel and in the equal distance as the first limits of the channel, called sliding parallels.

The extra line you introduce will just widen the initial channel and you can continue trading as the initial rules state.

All in all, this is how to trade the pattern.

I’m sure there is new stuff you have not been applying in trading the candlestick pattern.

You may also not have even heard about it. And, this guide has given you all you need to know to trade successfully.

Proceed to trade the pattern like a pro as you grow your trading account in 2021.

Happy Trading!