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The Harami Cross – A Candlestick Formation Foreshadowing Reversal

Jul. 17, 2013 9:30 AM ET
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Thomsett's Blog
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Some of the most recognizable candlestick indicators have two attributes. First, they involve two consecutive sessions and second, the contrast between the two is extreme. One excellent example of this two-part feature is the harami cross.

The word harami means "pregnant" in Japanese. It is a two-session indicator in which the colors of each session are opposite; and the second session opens and closes within the real body of the first. The opposite of an engulfing pattern, a bear harami starts with a white session and ends with a black. The bull harami starts with a black session and is followed by a smaller black session. So it mimics the appearance of pregnancy because the seconds, smaller session "protrudes" out of the first.

The harami cross is a variation in which the second session forms as a doji, meaning the opening and closing prices are identical or very close. So since harami means "pregnant," the harami cross represents the most extreme form. It appears as a horizontal line and any extension of trading above and below forms so that the session appears like a cross. Examples of both the bear and bull harami cross are found in the illustration.

The harami cross is not an entirely reliable reversal indicator, as it leads to reversal only in about half of all occurrences. However, it is the most extreme extension of the harami and that gives it greater reliability. It is stronger than the harami because the second session's doji is more of a contrast to the first day than it would be as a straightforward harami. As with all candlestick formations, confirmation is an important step to take, especially due to the low reliability as a reversal signal. You may not want to act on the indicated reversal until you find independent confirmation. This may be found through additional candlestick reversals, volume spikes, tests of support or resistance, and price gapping trends. When you find this or any other reversal signal at or near support or resistance, it demands special attention. A technical test of these trading range borders, when confirmed by candlestick formations, provides clearer reversal clues than when you find candlesticks mid-range or without other confirming clues.

You may also find confirmation in non-price indicators like RSI, OBV and MACD. These more reliable momentum oscillators can also be unclear and provide false signals, so when you find a signal within momentum as well as candlestick reversal, it improves confidence. Any chartist proceeding without utilizing confirmation policies is tempting disaster and timing is everything. The harami cross is a fine initial signal but it only has value if and when it is also confirmed.

To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at ThomsettOptions.com where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at ThomsettOptions.com to learn more. You can take part in discussions among members on the site at the Members Forum.

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