Last Updated on 2024-12-24 by Admin
Harami Cross Candlestick Pattern: Detailed Explanation
The Harami Cross is a reversal candlestick pattern that is similar to the basic Harami pattern but has one key difference: the second candle in a Harami Cross is a Doji. A Doji is a candlestick with little or no body, meaning the opening and closing prices are virtually the same, indicating market indecision.
The Harami Cross is considered a neutral pattern, and it suggests that a trend might be nearing an end and could reverse. However, like many candlestick patterns, confirmation from other technical indicators is often necessary to increase its reliability.
1. Components of the Harami Cross Pattern
The Harami Cross consists of two candlesticks:
First Candle (Mother Candle)
- The first candle is a long-bodied candle (either bullish or bearish), known as the mother candle.
- The first candle must be a significant candlestick in terms of its body, indicating the prevailing trend. The body of the first candle can be either bullish (green/white) or bearish (red/black), representing a continuation of the current trend.
Second Candle (Baby Candle – Doji)
- The second candle is a Doji candle, characterized by an extremely small body (or no body at all). A Doji indicates indecision in the market as the opening and closing prices are nearly the same.
- The body of the Doji must be completely contained within the body of the first candlestick, similar to a standard Harami pattern.
The presence of the Doji is the key distinction between the Harami Cross and the regular Harami, as it signals indecision and a potential change in direction.
2. Bullish Harami Cross
A bullish Harami Cross typically appears after a downtrend and suggests a potential reversal to the upside. The pattern is formed as follows:
- First Candle (Mother Candle): A long bearish (red/black) candle, showing that the market is in a downtrend and bears are in control.
- Second Candle (Doji): A Doji candle, indicating that the market is in a state of indecision, with neither the bulls nor the bears able to push the price significantly in either direction.
Interpretation:
- The long bearish candle indicates that the downtrend is strong, but the Doji shows a lack of conviction and indecision in the market.
- A potential reversal could be signaled, especially if the price starts to move higher after the Doji forms. The bullish Harami Cross suggests that the bears are losing their grip on the market, and the bulls may be taking control.
3. Bearish Harami Cross
A bearish Harami Cross typically appears after an uptrend and signals a potential reversal to the downside. The pattern is formed as follows:
- First Candle (Mother Candle): A long bullish (green/white) candle, indicating that the market is in an uptrend and the bulls are in control.
- Second Candle (Doji): A Doji candle, indicating indecision in the market, where neither bulls nor bears are able to push the price further in the direction of the prevailing trend.
Interpretation:
- The long bullish candle confirms the strength of the uptrend, but the Doji suggests that the market is at a turning point, with the bulls unable to push prices higher.
- A potential reversal to the downside is likely, as the Doji signifies a moment of indecision that could lead to a shift in market sentiment, with bears possibly starting to take control.
4. Key Characteristics of the Harami Cross Pattern
For the Harami Cross to be valid, certain characteristics must be present:
First Candle (Mother Candle)
- The first candle should be long and decisive, indicating the strength of the prevailing trend (either bullish or bearish).
- The mother candle should have a clear direction, either as a long bullish or bearish candle.
Second Candle (Doji)
- The second candle must be a Doji, meaning it has very little or no body (the opening and closing prices are very close or identical).
- The Doji’s body should be completely contained within the body of the first candle. This containment is crucial, as it signals a shift in market momentum from the prior strong trend to indecision.
- A Doji typically signals market indecision, where neither the buyers nor sellers are in control.
Trend Context
- The Harami Cross pattern must occur after a strong trend—either an uptrend or a downtrend. The pattern becomes more significant when it appears after an extended price move, as it suggests that momentum may be weakening, and a reversal could be forthcoming.
5. How to Trade the Harami Cross Pattern
The Harami Cross can be a powerful reversal signal, but like any candlestick pattern, it’s better to confirm it with additional indicators or price action to improve the reliability of the trade.
Entry Signal
- For a bullish Harami Cross (after a downtrend): A long position can be considered when the price breaks above the high of the Doji (the second candle). This suggests that buyers are regaining control, and the market may be reversing to the upside.
- For a bearish Harami Cross (after an uptrend): A short position can be considered when the price breaks below the low of the Doji (the second candle). This suggests that sellers are starting to take control, and the market may be reversing to the downside.
Stop Loss
- A stop loss should be placed just beyond the high of the first candle for a bullish Harami Cross or just beyond the low of the first candle for a bearish Harami Cross.
- This will help protect the position in case the price moves against the trade.
Take Profit
- The take profit can be set at key support or resistance levels, or based on a risk-to-reward ratio.
- If the price shows signs of reversing strongly, targets could be set at a previous swing low for a bullish reversal or swing high for a bearish reversal.
Risk Management
- As always, risk management is crucial. Ensure that your position size and stop-loss placement follow the principles of proper risk-to-reward ratio (e.g., 2:1 or 3:1).
- Don’t risk more than 1-2% of your total trading capital on a single trade.
6. Confirmation and Additional Indicators
To enhance the reliability of the Harami Cross, traders often use additional indicators or tools to confirm the pattern.
Volume
- Volume is important when trading the Harami Cross. Ideally, the Doji candle should be accompanied by decreasing volume compared to the prior trend, indicating that the momentum is slowing. However, a strong volume increase after the pattern may suggest that the reversal is supported by significant buying or selling interest.
Momentum Indicators
- RSI (Relative Strength Index): If the RSI is in overbought (above 70) for a bearish Harami Cross or oversold (below 30) for a bullish Harami Cross, this can act as a confirmation of the potential reversal.
- MACD (Moving Average Convergence Divergence): A MACD crossover can provide additional confirmation. A bullish MACD crossover after a bullish Harami Cross indicates a potential upside move, and a bearish MACD crossover after a bearish Harami Cross signals a downside move.
Trend Indicators
- If the Harami Cross forms near significant support or resistance levels, it can add weight to the potential reversal signal. A reversal from key levels can indicate that the market is losing strength in the prevailing direction.
- Moving Averages: If the price breaks above a significant moving average (e.g., the 50-period or 200-period MA) after a bullish Harami Cross, it can signal that the reversal is supported by the broader trend. A break below the moving average after a bearish Harami Cross suggests further downward momentum.
7. Limitations and Risks
Like all candlestick patterns, the Harami Cross has its limitations and risks:
False Signals
- The Harami Cross can sometimes lead to false signals, especially if it appears during periods of market indecision or consolidation rather than a strong trend. The pattern can suggest indecision, but it may not necessarily lead to a trend reversal.
- To reduce the risk of false signals, traders should wait for confirmation from other indicators before entering a trade.
Lack of Momentum
- The Doji in the Harami Cross represents indecision, but it doesn’t confirm the direction of the next move. Traders should wait for further price action to confirm whether the market will reverse or continue in the prevailing direction.
Trend Context
- The Harami Cross is more effective after an extended trend. If the pattern appears after only a minor move or during consolidation, the reversal signal may not be as reliable.
8. Example of the Harami Cross Pattern
Let’s say the market is in a downtrend:
- A long bearish candle forms, signaling strong downward momentum.
- A Doji forms the next day, signaling market indecision. The Doji’s body is completely within the range of the first candle.
- A bullish reversal could be signaled if the price moves above the high of the Doji.
In this case, a trader might enter a long position after the breakout above the Doji’s high, with a stop loss placed below the Doji’s low. The take profit can be set at a previous swing high or a key resistance level.
9. Conclusion
The Harami Cross is a powerful candlestick reversal pattern that signals potential market indecision and a possible shift in trend direction. The pattern consists of two candles: a long mother candle followed by a small Doji that is contained within the range of the first candle.
- A bullish Harami Cross suggests a reversal after a downtrend, while a bearish Harami Cross indicates a potential reversal after an uptrend.
- The Doji represents indecision, and the pattern’s significance increases when it follows a strong trend.
Traders should confirm the pattern with other technical indicators, such as volume, RSI, MACD, and moving averages, and use proper risk management strategies to ensure the success of their trades.
