Harami Candle is a candlestick with a small body, which occurs in the range of the relatively long body of the previous candle. Harami – is an ancient Japanese word meaning “pregnant”. Long candlestick is the “mother” and the small candlestick is “the baby” or “fetus”.
The Harami formation is the opposite of the Engulfing pattern. In the Engulfing pattern, there is a long body which “engulfs” the previous small body. In the Harami the little (short) body follows after the long body. Components of the Engulfing pattern should have a different color (different direction). For Harami color difference is not necessary. However, you can easily verify that most often, it consists of candles of contrasting colors.
Harami is not usually an important reversal signal, such as a Hammer, Hanging Man or Engulfing. Harami acts as a brake which stops the market; directly preceding trend is over and the market has a pause. Sometimes, Harami warns of a radical change in trend, especially when it appears at the peak of the market. Harami reflects the uneven development of the market. After the uptrend culminating with a strong white body, candle with a small body appears, indicating some uncertainty. It says about weakening the initiative of the bulls (buyers) and hence about the possible trend reversal. During the downward trend, the strong pressure of the sellers is evident by the candle with a long black body. Sudden appearance of the candle with a small body, indicates the confusion in the ranks of the warring parties. Such events may indicate a possible trend reversal since the small body of the second candle – is a sign of the weakening sellers power.
The classic Harami consists of two candlesticks: a candlestick with a long body is followed by candle with a smaller body. However, there are no strict rules to determine if candle body “small”. The basic rule reads: the smaller candle body, the greater the significance of the pattern. Moreover, a smaller candle body convincingly demonstrates the different market situation in which there may be a trend reversal. In extreme cases, when the difference between the closing price and the opening price of the second candle are almost equal a Doji candle appear. As mentioned above, the Doji that is displayed after a candle with a long body is called a Harami Cross. Harami Cross contains more valuable information than the classic Harami.
Harami Cross is one of the most significant figures in the Japanese Candlestick analysis. If a trader, who holds a long position, ignores the Harami Cross Pattern, he runs a high risk. Harami Crosses can be formed at the bottom, but they are more efficient on the top (like a bearish signal).