The Harami candlestick Pattern (the inside bar)
The Harami candlestick pattern (pregnant in Japanese) is considered as a reversal and continuation pattern, and it consists of two candlesticks:
The first candle is the large candle, it is called the mother candle, followed by a smaller candle which is called the baby. For the Harami pattern to be valid, the second candle should close outside the previous one. This candlestick is considered as a bearish reversal signal when it occurs at the top of an uptrend, and it is a bullish signal when it occurs at the bottom of a downtrend.
See an example below:
As you see the smaller body is totally covered by the previous mother candle, don’t bother yourself with the colors, the most important is that the smaller body closes inside of the first bigger candle. The Harami candle tells us that the market is in an indecision period. In other words, the market is consolidating.
So, buyers and sellers don’t know what to do, and there is no one in control of the market. When this candlestick pattern happens during an uptrend or a
downtrend, it is interpreted as a continuation pattern which gives a good opportunity to join the trend. And if it is occurred at the top of an uptrend or at the bottom of a downtrend, it is considered as a trend reversal signal.
Let’s take other example:
In the chart above, you can see how the trend direction changes after the Harami pattern formation, the first bullish harami pattern occurred at the bottom of a downtrend, sellers were pushing the market lower, suddenly price starts consolidating, and this indicates that the selling power is no longer in control of the market. The bearish Harami is the opposite of the bullish, this one occurred at the top of an uptrend indicating that buyer’s domination is over and the beginning of a downtrend is possible.
When this pattern is created during an uptrend or a downtrend, it indicates a continuation signal with the direction of the market.