Today I want to show you the Harami Pattern. The Harami pattern is one of the simplest and most easily identifiable configurations of technical analysis as it consists of only two candles which generally indicates a phase of market uncertainty that can lead to a reversal of the current Trend and differs into two types of pattern: Bullish and Bearish
BULLISH HARAMI
There is the interruption of a bearish trend and the beginning of a bullish trend.
Let’s see its construction:
The pattern is very simple, it is composed of a first bearish candle therefore with a closing price lower than the opening one; a second bullish candle with a closing greater than the opening and finally the body of the second candle must be totally included in that of the first or the opening price of the second candle must be higher than the previous closing, while the closing price must be lower than the previous one opening.
BEARISH HARAMI
There is the interruption of a bullish trend and the beginning of a bearish trend
Let’s see its construction:
The pattern is composed of a first bullish candle therefore with a closing price higher than the opening one; a second bearish candle with opening greater than the closing and finally the body of the second candle must be totally included in that of the first or the opening price of the second candle must be lower than the previous closing, while the closing price must be higher than the previous opening.
TRADING SYSTEM
Now let’s test the pattern to see how reliable it actually is, to do this I have developed a very simple trading system that enters when one of the two patterns occurs and exits at the end of the day. Here’s how it was written:
TESTING
I have used this system on the Crude Oil, Soybeans, S&P 500 and U.S. Dollar and for each I tested it on a Timeframe Daily and one at 60 minutes by buying 1 contract per operation. Here are the results:
Crude Oil
Soybeans
S&P 500
U.S. DOLLAR
As you can see, this type of pattern has not produced excellent results but in some markets it can be really useful even if used in reverse. I generally use Patterns as filters only after writing a strategy with a more robust engine and that above all in line with the nature of the tool!
In this case we first wrote the tool and then we tested it on the different natures of an instrument and as we could see, it is not the tool that makes a trading system profitable but the NATURE of a market and the knowledge of it.
Despite this, I have added this pattern to my list of filters that can be applied on systems that are looking for strong volatility or a market very prone to Breakout!
To the next article.