Harami Cross Trading: Definition, Causes, Use, and Example
The Harami Cross trading pattern is a popular technical analysis tool used by traders to identify potential trend reversals in financial markets. It is a two-candlestick pattern that can indicate a change in market sentiment.
Definition of Harami Cross Trading
The Harami Cross pattern can be either bullish or bearish, depending on the direction of the current trend. In a bullish Harami Cross pattern, the first candlestick is a bearish candlestick, indicating a downtrend. The second candlestick is a small bullish candlestick, suggesting a potential trend reversal. In a bearish Harami Cross pattern, the first candlestick is a bullish candlestick, indicating an uptrend. The second candlestick is a small bearish candlestick, suggesting a potential trend reversal.
Causes of Harami Cross Trading
The Harami Cross pattern occurs when there is a sudden shift in market sentiment. It can be caused by various factors, such as news releases, economic data, or changes in investor sentiment. Traders look for this pattern to identify potential reversals in the market and take advantage of the new trend.
The Harami Cross pattern is often seen as a sign of indecision in the market. It represents a tug of war between buyers and sellers, with neither side gaining control. This can lead to a reversal in the current trend as traders reassess their positions and take new positions based on the new information.
Use of Harami Cross Trading
Traders use the Harami Cross pattern as a signal to enter or exit trades. When a bullish Harami Cross pattern is identified, traders may consider buying or going long on the asset, anticipating a trend reversal to the upside. Conversely, when a bearish Harami Cross pattern is identified, traders may consider selling or going short on the asset, anticipating a trend reversal to the downside.
It is important for traders to confirm the Harami Cross pattern with other technical indicators or chart patterns before making trading decisions. This can help reduce the risk of false signals and increase the probability of successful trades.
Definition of Harami Cross Trading
Harami Cross Trading is a technical analysis pattern that is used by traders to identify potential reversals in the market. The term “harami” is derived from the Japanese word for “pregnant” and it refers to the shape of the pattern, which resembles a pregnant woman.
The harami cross pattern consists of two candlesticks. The first candlestick is a large bullish or bearish candlestick, which represents a strong move in the market. The second candlestick is a small doji candlestick, which has a small body and long wicks. The doji candlestick is completely engulfed by the body of the first candlestick, forming a cross-like shape.
The harami cross pattern is considered to be a reversal pattern because it indicates a potential change in the direction of the market. When the harami cross pattern forms after a downtrend, it suggests that the selling pressure is weakening and the buyers may start to take control. Conversely, when the harami cross pattern forms after an uptrend, it suggests that the buying pressure is weakening and the sellers may start to take control.
Traders use the harami cross pattern to make trading decisions. When the harami cross pattern forms, traders may look for confirmation signals such as a break of a trendline or a moving average crossover before entering a trade. They may also use other technical indicators or chart patterns to confirm the potential reversal.
| Advantages | Disadvantages |
|---|---|
| – Provides a clear visual signal of a potential reversal | – False signals can occur |
| – Can be used in conjunction with other technical indicators | – Requires confirmation signals for higher accuracy |
| – Can be applied to different timeframes and markets | – May not work in all market conditions |
Causes of Harami Cross Trading
1. Market Reversal: The Harami Cross pattern often occurs at the end of a trend, signaling a potential reversal in the market. It represents a shift in sentiment from bullish to bearish or vice versa. This reversal can be caused by various factors such as economic news, geopolitical events, or changes in market conditions.
2. Profit Taking: After a significant price movement, traders may decide to take profits, leading to a temporary pause or consolidation in the market. This profit-taking activity can create the conditions for a Harami Cross pattern to form.
3. Indecision: The Harami Cross pattern can also be a result of indecision among market participants. Traders may be uncertain about the future direction of the market and take a wait-and-see approach, leading to a period of consolidation and the formation of the Harami Cross pattern.
4. Technical Factors: Technical factors such as support and resistance levels, moving averages, or trendlines can also contribute to the formation of the Harami Cross pattern. These technical levels can act as barriers that cause the market to pause and potentially reverse its direction.
5. Volume and Liquidity: Changes in trading volume and liquidity can also influence the formation of the Harami Cross pattern. Lower volume and liquidity can result in a lack of market participants, leading to a consolidation phase and the formation of the pattern.
Use of Harami Cross Trading
Identifying Trend Reversals
One of the main uses of Harami Cross Trading is to identify potential trend reversals. A Harami Cross pattern occurs when a small candlestick, representing a period of indecision, is followed by a larger candlestick that engulfs the previous candlestick. This pattern suggests a potential reversal in the current trend.
Traders can use Harami Cross Trading to identify when a downtrend may be ending and an uptrend may be starting, or vice versa. By recognizing this pattern, traders can take advantage of potential changes in market direction and adjust their trading strategies accordingly.
Confirmation with Other Indicators
While Harami Cross Trading can be a powerful tool on its own, it is often used in conjunction with other technical indicators to confirm potential trend reversals. Traders may look for additional signals, such as support or resistance levels, moving averages, or volume indicators, to validate the potential reversal indicated by the Harami Cross pattern.
Setting Stop Loss and Take Profit Levels
Another use of Harami Cross Trading is to set stop loss and take profit levels. Once a trader identifies a potential trend reversal using the Harami Cross pattern, they can use this information to determine where to place their stop loss and take profit orders.
For example, if a trader identifies a Harami Cross pattern indicating a potential trend reversal from a downtrend to an uptrend, they may set their stop loss order below the low of the Harami Cross candlestick and their take profit order at a predetermined level of resistance. This allows the trader to limit potential losses and lock in profits if the trend reversal occurs as anticipated.
Example
To illustrate the use of Harami Cross Trading, let’s consider an example. Suppose a trader notices a Harami Cross pattern on a daily chart of a stock that has been in a downtrend for several weeks. The small candlestick represents a period of indecision, followed by a larger bullish candlestick that engulfs the previous candlestick.
The trader interprets this pattern as a potential trend reversal signal and decides to enter a long position. They set their stop loss order below the low of the Harami Cross candlestick and their take profit order at a predetermined level of resistance.
If the stock price starts to rise after the Harami Cross pattern, the trader can capture the upward movement and potentially make a profit. However, if the stock price continues to decline, the stop loss order will be triggered, limiting the trader’s losses.
| Advantages | Disadvantages |
|---|---|
| – Helps identify potential trend reversals | – False signals can occur |
| – Can be used in conjunction with other indicators for confirmation | – Requires experience and skill to interpret correctly |
| – Assists in setting stop loss and take profit levels | – Not suitable for all market conditions |
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.