In this review, we will analyze the formation features and trading methodology for the “Harami Cross” pattern. This is not a common but rather strong reversal pattern from candlestick analysis.
How is the Harami Cross formed?
Harami Cross pattern refers to reversal candlestick patterns and is formed at local highs and lows of the price chart. The pattern consists of two candles: the first candlestick has a large “body”, and the second is represented by a “doji” candlestick (it has no “body”, the opening and closing prices are the same). In this case, the “doji”, as a rule, opens with a gap against the movement of the first candlestick and must be completely within its price range.
The Harami Cross is a special case of the Harami reversal candlestick pattern, in which the second candlestick is represented by a spinning top – a small candle with a small body. It is believed that the Harami Cross gives a stronger reversal signal compared to the classic Harami pattern, since the appearance of the Doji candlestick indicates uncertainty and indecision of market participants, foreshadowing a correction or reversal of the current trend.
As the candlestick analysis guru noted Steve Nison, the appearance of a “doji” after a rather large white candlestick indicates the current overbought financial instrument. Conversely, the appearance of a “doji” after a large black candlestick indicates an oversold condition of the asset. Some sources refer to the Harami Cross pattern as a petrifying pattern.
Types of the “Cross Harami” pattern
The pattern is conventionally divided into bullish and bearish “Harami Cross”, which are formed after a downtrend and an uptrend, respectively:
- A bullish Harami Cross is formed during a downtrend at the local lows of the price chart. The first large bearish candlestick of the pattern shows an active advance of the bears. But then a Doji candle appears, which indicates that the bears are running out of strength and need a break. This leads to the appearance of an upward correction, which can then turn into a trend reversal. Confirmation of the beginning of the correction is the growth of quotations above the high of the first candlestick.
- A bearish Harami Cross appears at the top of an uptrend. The first large bullish candle in the pattern indicates that the bulls are actively pushing the market up. But then the appearance of the second Doji candlestick indicates that the buyers have already fizzled out and the bears have an opportunity to seize the initiative. A decrease in quotes below the minimum of the first candlestick of the pattern signals the beginning of a downward correction or even a possible trend reversal.
Trading on the “Cross Harami” pattern
Let’s consider the method of trading the bullish and bearish Harami Cross pattern.
Bullish “Harami Cross” – buy
The bullish pattern trading algorithm is as follows:
- During a downtrend, a bullish Harami Cross pattern is formed at the local low of the price chart.
- You can buy aggressively when the price rises above the high of the Doji (the second candle of the pattern), the Stop is placed behind the low of the first large bearish candle. In this case, the probability of the pattern being worked out is slightly reduced, but a more favorable Stop / Profit ratio is obtained.
- It is recommended to buy conservatively when quotes rise above the high of the first big candlestick, Stop is set beyond its low. In this variant, the probability of the pattern being worked out is slightly higher, but the Stop / Profit ratio is less favorable.
- To fix the Profit, you can focus on the Fibonacci retracement levels, built on the basis of the previous downward movement.
Bearish “Cross Harami” – sale
The algorithm for trading a bearish pattern looks like this:
- During an uptrend, a bearish Harami Cross pattern is formed at the local high of the price chart.
- You can aggressively open sells when the price drops below the low of the “doji” (the second candle of the pattern), the stop is set behind the high of the first large bullish candle. The probability of the pattern being worked out is lower, but the Stop / Profit ratio is better.
- It is recommended to sell conservatively when the quotes drop below the low of the first big candle, Stop is set beyond its maximum. The probability of the pattern being worked out is higher, but the Stop / Profit ratio is worse.
- To close the Profit, you can focus on the Fibonacci retracement levels drawn on the basis of the previous upward movement.
Recommendations for using the pattern
To successfully use the Harami Cross pattern in trading, you should pay attention to the following points:
- The emergence of the pattern should be preceded by a pronounced upward or downward impulse of the price movement; it is not traded in the sideways direction.
- It is recommended to use higher timeframes for trading: from H4 and higher.
- Preference should be given to highly liquid assets (currency pairs, gold, oil, liquid stocks, stock indices).
- When trading a pattern, you should always place protective Stop Loss orders and follow the rules of money management.
- The second candlestick of the pattern – “doji” – may well be “imperfect”, that is, its opening and closing prices may differ slightly.
The Harami Cross reversal pattern is formed at the local extremes of the price chart during an uptrend or a downtrend (bearish and bullish Harami Cross, respectively). The probability of the pattern working out increases in combination with technical analysis figures, support and resistance levels, signals of trading indicators. Before starting real trading, you should test the development of the pattern on historical data and practice on a demo account.
You can get acquainted with other candlestick patterns in this article: