Harami Cross

A Harami cross is a Japanese candlestick pattern that consists of a large candlestick followed by a small doji candlestick. The doji is contained within the large candlestick’s body. The Harami cross pattern suggests that the previous trend may be about to reverse. A Harami cross pattern can be either bullish or bearish.

A bullish harami cross pattern forms after an extended downtrend. The first candlestick is long and black (or red) and indicates that the bears are in control. The doji candlestick has a narrow range and opens above the previous day’s close. The doji candlestick closes at the same price it opened at, causing indecision. The indecision causes traders who were short to start covering their short positions, which often leads to a trend reversal.

A bearish harami cross appears after a prolonged uptrend. The first candlestick is long and white (or green), suggesting that the bulls have full control of the market. As with the bullish harami cross, the doji candlestick represents indecision among traders that may trigger a trend reversal. Ideally, heavy volume should accompany the first bar of the harami cross pattern to show either climatic buying or selling.

Traders should seek confirmation from price action and other indicators when trading the harami cross pattern. Trades have a higher probability of success if they find the harami cross at significant support and resistance levels. For example, the low of the first candlestick may be at a key psychological number, or sitting on a commonly used moving average, such as the 200-day. Aggressive traders could enter into a position when the doji candlestick closes. Conservative traders might wait for the price to close outside the range of the first candlestick for confirmation that a reversal is occurring.

Traders can place a stop-loss order outside the range of either the large candlestick or doji depending on their risk tolerance. A smaller stop outside the doji allows for a larger position to be taken, but at the risk of getting stopped out by market noise, while a wider stop-loss order outside the large candlestick’s range requires a smaller position size, but gives the trade more room to breathe.

The pattern can appear in any timeframe but has more significance if it appears on the daily and weekly charts. As the pattern typically signals a trend reversal, a risk-reward ratio of at least 3:1 should be used to compensate traders for the risk taken.

(For more, see: How are Harami Cross Patterns Interpreted by Analysts and Traders?)