Bearish Harami: what it is and how to trade using Bearish Harami candlestick pattern in Forex

Originally from Japan in the 17th century, candlestick charts have become one of the most popular technical methods of defining financial market trends. The market's only constant is that it goes through motions, which creates momentum for opportunities. Skilled traders who can recognise trend reversals can use fluctuations to their benefit and gain significant profit.

There are a lot of nuances that go into reading candlestick patterns. To successfully use a Bearish Harami candlestick pattern in Forex trading, one needs to know how to recognise and validate it. And that is precisely what we are going to teach you in this article.

What is a Bearish Harami?

A Bearish Harami is a bearish two-bar Japanese candlestick reversal pattern typically observed at the peak of a price chart, indicating a potential trend reversal. This candlestick combination can be found at the end of a bullish or bearish trend.

To use this pattern in trading, one needs to understand the psychological mechanism behind it. As candlesticks reflect particular timeframes and the actions that market participants take (or don't take) during that time, a Bearish Harami candlestick combination signals hesitation by the bulls (buyers) and trading opportunities for the bears (sellers).

Key features of a Bearish Harami pattern

Visually, the pattern is represented by two candlestick bars: the bigger bullish candle and a smaller bearish candle.

In a true fashion of a Bearish Harami pattern, the first candlestick encompasses the entire body of the second, smaller one. It's a typical form of an inside bar pattern, only that it is formed at the Highs and Lows.

A textbook Bearish Harami candlestick pattern has the following characteristics:

• It occurs at the end of an upward trend.
• The entire body of the bearish candlestick, including its highs and lows, fits into the body of the bullish one.
• It is formed near the price resistance points that are confirmed by the economic and political climate.

When all these conditions are met, the probability of a trend reversal is really high.

How to recognise a Bearish Harami on charts

1. Choose a chart for analysis.
2. Identify the trend. Before making any trading decisions, it is important to study the chart diligently to confirm that you are indeed on an uptrend. Typically, using a high timeframe is recommended when analysing this specific candlestick pattern.

While waiting for the Bearish Harami to materialise, exercise patience and be cautious of potential misleading signals that this pattern can sometimes generate independently. To enhance your analysis and decision-making process, consider combining the Bearish Harami formation with other confirming factors.

Examples

In terms of location, this bar would be at the price pinnacle on the chart, as an uptrend precedes it.

1 – Bullish trend
2 – Bearish Harami
3 – Bearish trend

Consider the example above where the USDJPY currency pair has been trending upwards. You observe the following candlestick formation:

1. A large Bullish candle closes at a high price.
2. The next period opens at or near the close of the previous candle but forms a smaller Bearish candle that closes lower, entirely within the range of the first candle.

This setup signals that although buyers were initially strong, they are losing control, and sellers may soon dominate, potentially leading to a price decline.

Difference between the Bearish and Bullish Harami

We have briefly mentioned before that a Bullish Harami is the counterpart to the Bearish one and is also used to determine a trend reversal. By that logic, a Bullish Harami signals to investors that the buyers are taking back control and preparing to make a move.

Consider an example of Bullish Harami from the chart:

How to trade the Bearish Harami candlestick pattern

Recognising patterns is not the only way to use market volatility in trading successfully. Understanding the direction of the general trend and assessing probabilities, in addition to the psychology of the players, is key. Typically, market movement indicators are used for this purpose, and trading strategies can be based on them.

Strategies to trade the Bearish Harami

Support/Resistance

Most traders use price action as their main strategy, where they analyse candlestick patterns in relation to historical levels of support and resistance. They observe how the market reacts at these pivotal points, either bouncing off them or retesting those zones for potential reversals or continuations.

For instance, below there is a Bullish Harami candlestick pattern formed precisely at a significant past support level, indicating a potential bounce that could fuel further bullish momentum in the ongoing trend.

Here are helpful trading tips that apply to this strategy:

1. Identify the general trend.
2. Locate the candlesticks that signal a trend reversal / continuations.
3. Put a stop-loss order at the bottom of the Bullish Harami pattern.

The Bullish Harami candlestick pattern is a useful tool for identifying potential turning points in the market, particularly at levels where demand and supply zones. Traders often look for this pattern near these key zones to help anticipate future price movements.

Bearish Harami pattern reliability

Statistically speaking, this pattern is estimated to be effective about 53% of the time, meaning that bullish trends typically have stronger momentum to continue.

However, there are ways to improve its effectiveness. No pattern works in isolation from external conditions, which means outside the general financial market context.

Here are a couple of tells that can help you identify an authentic reversal trend.

Seasonality

Do you remember that there is a psychological mechanism behind this pattern? Certain conditions can boost the stalling and general indecision of the bulls.

Time of day matters in justifying a trend reversal. A bearish trend is most likely to emerge in the evenings when traders are locking in their profits and slowing down. Lunch breaks and overnight gaps in trading also tend to have the same effect on trends.

But in terms of seasons, you should pay special attention to events that produce much volatility and emotional distress in society, like federal decisions and employment reports. The excess volatility can be your hint at making the reversal pattern more reliable.

Ranges of the candles

The more significant the difference in range between the Bearish Harami candlesticks, the stronger the potential for a trend reversal in trading.

An ideal situation is like this: a wide-range bearish candle showing a solid conviction for a change of direction engulfing a contracted bullish candle with a narrow body.

Similarly, traders are strongly advised to avoid candles with akin body shapes and spike lengths, as they provide unreliable clues as to the market's sentiment.

Volume

Actual Harami reversals are proven by volume. As bulls lose momentum and bears gain a foothold, the bearish candle should expand in size. But the next green-bodied candle should contract in range, demonstrating the stall of the bears' surge.

Skilled traders combine volume clues and pattern analysis to sync the chart signals with the emotional narrative. This helps you validate when the enthusiasm on the buyers' or sellers' part is about to wane and reach a turning point.

Conclusion

• A Bearish Harami candlestick pattern signals a potential downturn in prices.
• It consists of two candlesticks: a larger bullish bar followed by a smaller bearish one, indicating hesitation among buyers and potential opportunities for sellers.
• To effectively use this candlestick in Forex trading, traders employ various strategies, such as the Price action Strategy and the demand and supply.
• Statistically, this pattern has a reliability of about 53%. Factors like market conditions, seasonal influences, and volume can enhance the effectiveness of the Bearish Harami.
• For optimal results, use context clues and market movement indicators to confirm a trend reversal and assess your chances of success in your chosen strategy.