What is a bullish harami (simple definition)
– A bullish harami is a two-candle pattern on a candlestick chart that can indicate a possible end to a short-term downtrend. It appears when a relatively small bullish candle (a day where the close is above the open) is contained entirely within the vertical range of the preceding larger bearish candle (a day where the close is below the open). Traders read this as potential evidence that selling pressure is easing and buying interest may be returning.
Key terms (defined)
– Candlestick chart: a price chart that shows the open, high, low, and close for a given period as a rectangle (the body) with thin lines (wicks or shadows) above and below.
– Body: the rectangle portion of a candlestick, spanning the open and close prices.
– Doji: a candlestick whose open and close are nearly equal, producing a very small body; often interpreted as indecision.
– Downtrend / bearish trend: a sequence of price action where recent highs and lows move lower.
How the pattern forms (step-by-step)
1. Prior context: the market has been moving downward (several recent bearish candles).
2. First candle (large bearish): a long body where the open is well above the close, showing strong selling that day.
3. Second candle (small bullish or doji): the open and close are close together and the close is above the open (or nearly equal if a doji). Crucially, the entire body of this second candle lies within the vertical range of the first candle’s body.
4. Interpretation: the small inside candle suggests that sellers could be losing momentum; buyers are starting to push price higher, at least temporarily.
Checklist — how to recognize a valid bullish harami
– There is a clear preceding downtrend (look back several bars).
– Candle 1: bearish (open1 > close1) with a relatively large body.
– Candle 2: bullish (close2 > open2) or a doji (open2 ≈ close2) with a small body.
– Containment: max(open2, close2) close1 — i.e., the second body is completely inside the first body.
– Prefer additional confirmation before acting (see notes below).
Worked numeric example
– Day 1: open1 = 100, high1 = 102, low1 = 89, close1 = 90. This is a large bearish candle (body from 100 down to 90).
– Day 2: open2 = 92, high2 = 96, low2 = 91, close2 = 95. This is a small bullish candle (body from 92 up to 95).
– Containment test: max(open2, close2) = 95 close1 = 90. So the Day 2 body is fully inside Day 1 body: this meets the harami shape.
– Interpretation: Day 2’s higher close (95 vs. Day 1 close 90) suggests rising buying pressure. A trader wanting confirmation might wait for Day 3 to close above Day 2’s high (96) before considering a long trade.
Practical notes and limitations
– A bullish harami is a reversal signal, not a certainty. It is stronger when it
is preceded by a clear downtrend, the first candle has a relatively large real body (showing strong prior selling), and the second candle is unambiguously inside that body and closes higher. Other factors that strengthen the signal include above-average trading volume on the second day, bullish divergence on an oscillator (for example, RSI), or proximity to a known support level.
Practical checklist for using a bullish harami
– Context: confirm there has been a prior downtrend (several bars or a clear slope on a chosen timeframe). A harami in chop is weak.
– Shape: Day 2’s real body must be fully contained within Day 1’s real body (no need to worry about wicks/shadows for the strict body-containment rule).
– Momentum/volume: stronger if Day 2 has equal or higher volume than recent bars.
– Confirmation: wait for an extra filter before risking capital—common choices:
– Close above Day 2’s high (Day 3 close > Day 2 high).
– Close above a short-term resistance (e.g., a moving average or the midpoint of Day 1’s body).
– Supporting indicator (bullish MACD crossover, RSI rising from oversold, etc.).
– Timeframe alignment: pattern on higher timeframes (daily, weekly) is more meaningful than on very short intraday bars.
Trade execution and risk controls (step-by-step)
1. Identify the pattern and check the checklist above.
2. Decide entry trigger:
– Preferred: buy on a candle close above Day 2 high.
– Alternate: buy on intraday break above Day 2 high with a rule to exit if it fails to sustain.
3. Place stop-loss:
– Conservative: just below Day 2 low.
– Aggressive: below Day 1 low (wider; use only if position size is reduced).
4. Set profit targets:
– Use a risk-reward rule (e.g., target 1.5×–3× risk).
– Or use technical targets: prior support-turned-resistance, Fibonacci levels, or a measured-move projection.
5. Position sizing:
– Risk per trade = account equity × (risk percentage).
– Shares/contracts = Risk per trade / (entry price − stop price).
6. Monitor: if price stalls, tighten stop or trail it to lock gains.
Worked numeric example
– Scenario parameters: account size = $10,000; risk per trade = 1% ($100). You identify a bullish harami and choose the following prices:
– Day 2 high (entry trigger) = $101
– Day 2 low (stop) = $94
– Risk per share = 101 − 94 = $7.
– Maximum shares = $100 / $7 ≈ 14 shares (round down to 14).
– If you enter 14 shares at $101, risk = 14 × $7 = $98 (within $100 limit).
– If your target is 1.5× risk, target profit = 1.5 × $98 = $147 → target price = 101 + ($147 / 14) ≈ $111.5.
Common pitfalls and limitations
– Low sample size: candlestick patterns are probabilistic; many fail. Always require confirmation and risk control.
– Timeframe mismatch: pattern on 5‑minute chart may mean nothing on daily chart—align with your trading horizon.
– News and events: earnings, macro releases, or low liquidity can invalidate technical signals.
– False signals: a small inside-day can form from consolidation rather than a reversal; volume and context matter.
– Survivorship/selection bias: backtests that pick only “successful” haramis overstate effectiveness.
How a bullish harami differs from related patterns
– Bullish engulfing: Day 2’s body completely covers Day 1’s body and closes higher — generally a stronger reversal signal than a harami.
– Piercing line: Day 2 gaps lower then closes more than halfway into Day 1’s body — also a different bullish reversal with its own rules.
– Harami vs. Doji Harami: a Doji on Day 2 (virtually no body) is a specific harami variation implying indecision; confirmation is usually more important.
Quick scanning checklist to add to a trading routine
– Look for the pattern after a clear downrun of X bars (define X for your strategy, e.g., 5–10 daily bars).
– Verify Day 2 body is fully contained.
– Check Day 2 volume ≥ average of last N bars (e.g., N = 10).
– Note nearby support areas or moving averages.
– Mark a confirmation rule (e.g., Day 3 close > Day 2 high).
– Pre-calculate stop size and position size before entering.
Sources for further reading
– Investopedia — Bullish Harami: https://www.investopedia.com/terms/b/bullishharami.asp
– StockCharts — Candlestick Pattern Dictionary (Harami): https://school.stockcharts.com/doku.php?id=chart_analysis:candlestick_pattern_dictionary
– TradingView — Candlestick Patterns Guide: https://www.tradingview.com/education/candlesticks/
– CMT Association — Technical
—Technical Analysis (CMT Association): https://cmtassociation.org/
—Steve Nison — CandleCharts (candlestick education and historical background): https://www.candlecharts.com/
Worked numeric example (step‑by‑step)
Assumptions
– Account size: $100,000.
– Risk per trade: 1% of account = $1,000.
– Confirmation rule: Day 3 close > Day 2 high.
– Stop rule: below Day 2 low (with a small buffer).
– Volume rule: Day 2 volume ≥ 10‑day average.
Observed price action (daily candles)
– Day 0 (prior downrun): several down days.
– Day 1 (large bearish day): open 60, close 50 (body 60→50). Day 1 low = 49.5, high = 60.
– Day 2 (small bullish harami bar): open 51, close 53 — body 51→53 is fully inside Day 1 body (50–60). Day 2 low = 50.8, day 2 high = 53. Day 2 volume = 1.2M; 10‑day average = 0.9M (volume OK).
– Day 3 (confirmation): close 56 (> Day 2 high 53).
Entry decision
– Enter on Day 3 close = 56 (or on a predefined break above Day 2 high, per your rule). Note: entering at the close is simpler for backtesting; intraday execution may differ.
Stop placement
– Place stop just below Day 2 low. Day 2 low = 50.8; add 0.3 buffer → stop = 50.5.
Position sizing
– Dollar risk per share = entry − stop = 56 − 50.5 = 5.5.
– Maximum risk = $1,000.
– Shares = Max risk / dollar risk per share = 1,000 / 5.5 ≈ 181 shares.
– Position cost ≈ 181 × 56 = $10,136 (about 10.1% of account).
Example outcome checks (illustrative)
– If price hits stop at 50.5, loss = 181 × 5.5 ≈ $995 (≈1% of account).
– If price later reaches a target of 68 (example reward), gain = 181 × (68−56) = 181 × 12 = $2,172 (risk:reward ≈ 1:2.18).
Notes on the example
– The buffer below Day 2 low is to avoid normal intraday noise; size of buffer depends on volatility and time frame.
– Using Day 1 low instead of Day 2 low usually requires a larger stop and therefore a smaller position. Choose the stop rule that matches your risk tolerance and backtest results.
– Volume confirmation and nearby structural support (moving averages, fib levels) improve the odds but do not guarantee success.
Practical checklist to add to your routine (compact)
1. Confirm the pattern forms after a defined downrun length (e.g., 5–10 bars).
2. Verify Day 2 body is contained within Day 1 body.
3. Check Day 2 volume vs recent average.
4. Identify nearest support or trend context.
5. Define your confirmation trigger (e.g., next bar close > Day 2 high).
6. Precompute stop, buffer, and position size.
7. Record trade parameters before entry and log outcome for later review.
Limitations and common
pitfalls
– Small sample size. Single or occasional bullish harami occurrences do not prove predictive power. Candlestick patterns are statistical signals that require many observations to estimate reliability.
– Context dependence. A bullish harami inside a strong long-term downtrend, at resistance, or on low liquidity has a much lower chance of producing a sustained reversal.
– Ambiguous rules. Different traders define “contained body,” required prior downrun length, or confirmation trigger differently. Inconsistent definitions produce inconsistent results.
– False breakouts. Price often violates a confirmation level briefly (a wick or gap) and then resumes the prior trend, which can trigger premature entries or stop-outs.
– Volume misinterpretation. Higher volume on Day 2 can help, but spikes may reflect short-covering or news rather than durable buying interest.
– Survivorship and look-ahead bias in backtests. Filtering only clear examples or using future information will overstate performance.
mitigations — how to reduce these risks
1. Standardize definitions before testing.
– Define minimum prior downrun (e.g., at least 5 bars).
– Specify Day 1 and Day 2 body rules (open/close only; ignore wicks).
– Set a confirmation rule (e.g., close above Day 2 high on the next bar).
2. Use multi-factor confirmation.
– Require nearby structural support (moving average, prior swing low).
– Prefer higher-than-average volume on Day 2 or on confirmation bar.
3. Implement strict risk control.
– Risk a fixed percentage of capital per trade (common range 0.5%–2%).
– Place stop below a defined level (e.g., below Day 1 low) and precompute position size.
4. Wait for clean breakouts.
– Optionally use a buffer (e.g., enter after close > Day 2 high + 0.1%).
5. Test across instruments/timeframes.
– A pattern that works on daily large-cap stocks may not on thinly traded small caps or 5-minute FX charts.
worked numeric example (position sizing and stops)
Assumptions:
– Trading account: $50,000.
– Risk per trade: 1% of account = $500.
– Instrument: stock currently trading at $40.00.
– Bullish harami identified: Day 1 low = $37.50, Day 2 high = $39.20.
– Entry trigger: buy on close above Day 2 high. Entry price assumed = $39.30 (includes 0.1 buffer).
– Stop placement: below Day 1 low at $37.40 (10¢ below low for buffer).
– Stop distance = Entry − Stop = $39.30 − $37.40 = $1.90 per share.
Position size (shares) = Risk per trade / Stop distance
= $500 / $1.90 ≈ 263 shares (round down to 263).
Capital required ≈ 263 × $39.30 = $10,335.
Max risk realized if stop hit = 263 × $1.90 = $499.70 ≈ $500.
If you prefer fixed-dollar stops expressed as percentage, convert accordingly. Always round share counts to whole shares and recompute actual risk.
trade management and exits
– Initial stop: defined pre-entry (e.g., below Day 1 low). Do not move it wider unless planed rule allows.
– Partial profit-taking: sell a portion at a conservative target (e.g., 1:1.5 risk:reward), let remainder run with a trailing stop.
– Trailing stop: move stop to breakeven once trade gains one average stop distance; afterward trail by a fixed fraction (e.g., 0.5× ATR) or below higher swing lows.
– Time-based exit: if no confirmation within N bars (e.g., 3 bars), exit and re-evaluate.
– Re-entry rules: only if a new acceptable bullish harami or other confirmation appears; avoid averaging into a losing position without a predefined plan.
backtesting checklist (minimum metrics to record)
– Number of trades and period tested.
– Win rate (percent profitable).
– Average win and average loss.
– Profit factor = gross profit / gross loss.
– Expectancy per trade = (win rate × average win) − ((1 − win rate) × average loss).
– Maximum drawdown and longest losing streak.
– Slippage and commission assumptions.
– Filter sensitivity: how results change when you tighten/loosen pattern definitions or add volume/MA filters.
sample simple backtest rules to try
1. Timeframe: daily bars.
2. Prior downrun: at least 5 consecutive sessions with lower closes.
3. Bullish harami: Day 2 close inside Day 1 real body.
4. Confirmation: next-day close > Day 2 high.
5. Stop: day 1 low minus 0.2% buffer.
6. Position sizing: 1% risk per trade.
7. Exit: take 50% off at 1.5× risk, trail remainder with 10-day ATR × 0.8.
interpret results cautiously. Look for robustness across markets and time periods.
summary checklist (compact)
– Confirm pattern definitions and prior downrun.
– Require a clear confirmation rule before entry.
– Predefine stop, buffer, and position size (use the position-sizing formula above).
– Use structural context (support, moving averages) and volume as filters.
– Backtest with realistic slippage and commissions.
– Log every trade and review aggregate metrics regularly.
sources (for further reading)
– Investopedia — “Bullish Harami”: https://www.investopedia.com/terms/b/bullishharami.asp
– StockCharts — “Candlestick Pattern Dictionary”: https://school.stockcharts.com/doku.php?id=chart_school:chart_analysis:candlestick_pattern_dictionary
– CME Group — “Volume: What It Is and How to Use It”: https://www.cmegroup.com/education/courses/what-is-volume.html
– CFA Institute — Investor resources and reading on market technical analysis: https://www.cfainstitute.org
– U.S. Securities and Exchange
Commission — Investor.gov (U.S. Securities and Exchange Commission investor education): https://www.investor.gov
educational disclaimer
– This material is educational only and not personalized investment advice. It does not recommend buying, selling, or holding any security.
– Technical patterns (like the bullish harami) are probabilistic signals; they do not guarantee outcomes. Always consider fundamental context, market structure, and risk management.
– Before trading with real capital, test rules with historical and paper-trading exercises; include realistic slippage and commissions. If needed, consult a licensed financial professional.