What is the Harami Cross?
The harami cross is a candlestick pattern used in security trading. It is a large candlestick that follows or moves in the direction of the current trend associated with the stock, followed by a small Doji candlestick that is fully within the previous candlestick’s body length.
The color (red, green, black) is of less importance for the Doji. Regardless of the color, the Doji candle shows indecision in the market, and if appearing near the top or bottom of a trend, it provides potential signs for the slowing or reversal of the current movement. Depending on where the trend is moving, the pattern can signal either a bullish or bearish reversal.
If the trend is moving down and begins to switch with the Doji centered in the previous candlestick, it is considered a bullish pattern/reversal. If the trend is moving upward and then begins to flip with the Doji again within the last stick candle, it is considered a bearish pattern/reversal.
- The hamari cross pattern consists of one candlestick and one doji fully contained by the previous candlestick.
- The bullish hamari occurs when the original trend and candlestick are downward, hinting at a bullish reversal. Alternatively, the bearish hamari occurs when the original trend and candlestick are upward, and doji is fully contained by the previous candlestick, hinting at a bearish reversal.
- Both bullish and bearish hamari cross patterns need supporting analysis and data to back up what is seen. As an indicator, it should not be traded in isolation. Confirmation of the hamari cross pattern is also essential.
Bullish Harami Cross
The bullish pattern shows a possible price reversal to the upside, as shown on the left side of the photo below. The bullish situation includes a large downwards pointing candlestick to begin, representing the sellers being in control. It is then followed by an upward doji that is fully confined by the previous candlestick.
Generally, traders do not act on the pattern alone. Instead, they wait for the next couple of upward trending candles to confirm their belief. It is referred to as “confirmation.”
If traders receive enough confirmation, they will most likely buy the security with the hopes the new upward trend continues and their investment grows.
Bearish Harami Cross
A bearish pattern shows a potential future downward trend. It occurs after an upward trend with a long upward candle meaning the buyers are in control. The upward candle is then followed by a doji which, similarly to before, must be within the previous candle’s length. It represents indecision from the buyers and potential change of momentum because the doji “gaps” open closer to the mid-range of the previous candle.
Advantages and Disadvantages of the Harami Cross Technique
As with any trading analysis/technique, the harami cross technique comes with many advantages and disadvantages. Some benefits of the harami cross strategy include attractive entry levels for investments as the trends potentially reverse upwards. The movement is more straightforward to spot for beginner traders than many alternatives, providing a more attractive risk-reward ratio for many of its users.
One disadvantage associated with the harami cross is the lack of other indicators with it. A trade should not be made with the available information alone; other technical analyses and indicators are crucial to confirm the potential paybacks of this indicator.
Finally, the validity of the harami cross is contingent on the price actions around it, where it appears in the trend, associated indicators, and other supporting factors. All of which can be for better or for worse, depending on the specific time and trade.
Risk and Reward
Certain techniques can aid the harami cross pattern and hopefully reduce the risk-reward of the investment. A widespread example is implementing a stop-loss. If it is for a bullish harami cross, the stop-loss would be placed below the low of the original candlestick; if the trader was wrong and the investment continues its previous downward trend, the investment will be sold before losses become too large.
If a bearish harami cross and the trader are entering a short position, they can place a stop-loss above the original candlestick. Similarly, if the trend does not switch, the investor will incur less loss. “Take profit” targets can also be used to help traders exit a trade profitably. The harami cross pattern does not show profit targets through such a strategy. However, other techniques can be used simultaneously to determine the optimal exit strategy.
Finally, it is crucial to use other analyses and indicators alongside the hamari cross pattern. Such a strategy is often an indicator for traders of a trend reversal. It tells them it would be valuable to do more analysis to purchase or sell their existing investment but will not always need action following the original indicator.
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