It is already pretty tough in trying to determine whether it will reverse or continue in a downtrend as a trader navigating the stock market. Thus, lost opportunities and even loss may stand over them.
One of the tools that traders have available to determine market sentiment are candlestick patterns. However, identifying which pattern to focus on is daunting.
One such pattern has received attention due to the possible reversal signaled in downtrends: the Bullish Harami. Does this pattern really work and yield profit, or is it a mystical nonsense avoided by most traders? To answer this question, we explain not only what the Bullish Harami pattern is but also backtest its performance on the S&P 500 to determine whether it works as a trading strategy.
Free Recharge
In this post, we are going to delve deep in the Bullish Harami candlestick pattern: identification, implications, and even what we saw from our backtests. By the end, you will know whether this pattern will add something to your trading approach or not and how to make the right usage of it in your trading toolbox.
What Is the Bullish Harami?
Definition of the Bullish Harami
The Bullish Harami is a two-candle pattern frequently occurring in the presence of an existing trend that happens downward. It consists of:
- First Candle: Long bearish candle with a huge red body, representing intense selling.
- Second Candle: Small bullish candle, sometimes also a doji, whose entire body is overlapped by the body of the previous candle. This candle represents indecision as it opens near to closing at nearly the same price level.
Such an appearance will suggest that momentum is on the side of bulls over bears.
Recognizing the Bullish Harami
To spot a Bullish Harami, there is the following guideline:
- Bearish Downtrend: The pattern should occur within an evident downtrend where the price has declined in general.
- Huge Bearish Candle: It’s made up of a long black candle that indicates strong selling pressure.
- Small Bullish Candle: The second candle has to be small, preferably a doji and completely covers within the body of the first candle.
What Does a Bullish Harami Mean?
The Bullish Harami indicates a potential reversal of the ongoing trend down. The sizeable bearish candle indicates that selling pressure is building up because sellers are in control, but the second small bullish candle gives an impression that buyers are ready to start buying in the market.
Key Considerations When You Are Trading the Bullish Harami
Confirmation
A Bullish Harami could be an indication of a possible reversal but it is far from being a confirmed signal. Try and seek confirmation with for example, a higher price on the next candle which makes the case for the bulls even stronger.
False Signals
Similar to any other technical indicator, the Bullish Harami can also send false signals. Of course, one needs to continue without making excessive reliance on such a pattern; instead, it should be employed in conjunction with other tools and indicators for a more comprehensive trading strategy.
Teaming It Up with Other Indicators
Also, you can add reliability with the other technical indicators, including the Relative Strength Index, when using the Bullish Harami. For example, buying only on an oversold RSI condition adds another layer of confirmation.
Backtesting the Bullish Harami
Why Backtest?
We then performed a backtest on the S&P 500, analyzing data from 1993 up until today in an attempt to find out if the Bullish Harami pattern can indeed be a viable trading strategy. Because it provides us with an opportunity to measure how the pattern would have fared in real market conditions in the past, we used backtesting.
Trading Rules
For our backtest, we set the following trading rules:
- Identify a Bullish Harami pattern.
- Ensure that the 5-day RSI level is below 40.
- Buy at the close of the second candle on encountering both the above and below conditions, hold for ten days.
Backtest Results
Analysis of the results coming out from the trading rules after applying it, we analyzed the outcomes. The average gain per trade was about 0.95% if sold after ten trading days, which is approximately double the return of random trading periods of the same length. The equity curve derived from these trades showed a steady upward trend, though not without fluctuations.
Win Rate of Bullish Harami
The win rate of trades was between 55% to 70%, depending on the holding period. Another important finding was that the longer the holding period, the better the win rate in trades with the Bullish Harami. Such a phenomenon can be explained by the overall trend of upward stock price momentum over time, especially in bull markets.
Application to Traders
Adding the Bullish Harami to Your Trading System
With regard to the successful implementation of the Bullish Harami in your trading system, consider the following:
- Combination with Other Indicators: It should be used with other technical indicators such as RSI or moving averages for better confirmation.
- Market Conditions: Observe the prevailing market conditions before you begin using the Bullish Harami pattern in your trading system. It has the potential to work well under different market conditions.
- Define Your Risk Tolerance: Establish how much risk you will take within each trade given your strategy and principles of risk management.
Conclusion
The Bullish Harami is a great trading tool if you are looking for a reversal in downtrends. While our backtest has proven positive, proofing with more additional indicators while being cautious for false signals remains critical for successful trading.
Understanding the intricacy of the Bullish Harami as well as when to utilise it in a bigger trading system, can boost your ability to make successful decisions on when to buy or sell within the stock market. If you would like to know another type of pattern, please feel free to type your suggestion into the comments section below!
Bullish Harami Candlestick: Definition, Trading, and Backtest
Problem
It is already pretty tough in trying to determine whether it will reverse or continue in a downtrend as a trader navigating the stock market. Thus, lost opportunities and even loss may stand over them.
One of the tools that traders have available to determine market sentiment are candlestick patterns. However, identifying which pattern to focus on is daunting.
One such pattern has received attention due to the possible reversal signaled in downtrends: the Bullish Harami. Does this pattern really work and yield profit, or is it a mystical nonsense avoided by most traders? To answer this question, we explain not only what the Bullish Harami pattern is but also backtest its performance on the S&P 500 to determine whether it works as a trading strategy.
#
In this post, we are going to delve deep in the Bullish Harami candlestick pattern: identification, implications, and even what we saw from our backtests. By the end, you will know whether this pattern will add something to your trading approach or not and how to make the right usage of it in your trading toolbox.
What Is the Bullish Harami?
Definition of the Bullish Harami
The Bullish Harami is a two-candle pattern frequently occurring in the presence of an existing trend that happens downward. It consists of:
- First Candle: Long bearish candle with a huge red body, representing intense selling.
- Second Candle: Small bullish candle, sometimes also a doji, whose entire body is overlapped by the body of the previous candle. This candle represents indecision as it opens near to closing at nearly the same price level.
Such an appearance will suggest that momentum is on the side of bulls over bears.
Recognizing the Bullish Harami
To spot a Bullish Harami, there is the following guideline:
- Bearish Downtrend: The pattern should occur within an evident downtrend where the price has declined in general.
- Huge Bearish Candle: It’s made up of a long black candle that indicates strong selling pressure.
- Small Bullish Candle: The second candle has to be small, preferably a doji and completely covers within the body of the first candle.
What Does a Bullish Harami Mean?
The Bullish Harami indicates a potential reversal of the ongoing trend down. The sizeable bearish candle indicates that selling pressure is building up because sellers are in control, but the second small bullish candle gives an impression that buyers are ready to start buying in the market.
Key Considerations When You Are Trading the Bullish Harami
Confirmation
A Bullish Harami could be an indication of a possible reversal but it is far from being a confirmed signal. Try and seek confirmation with for example, a higher price on the next candle which makes the case for the bulls even stronger.
False Signals
Similar to any other technical indicator, the Bullish Harami can also send false signals. Of course, one needs to continue without making excessive reliance on such a pattern; instead, it should be employed in conjunction with other tools and indicators for a more comprehensive trading strategy.
Teaming It Up with Other Indicators
Also, you can add reliability with the other technical indicators, including the Relative Strength Index, when using the Bullish Harami. For example, buying only on an oversold RSI condition adds another layer of confirmation.
Backtesting the Bullish Harami
Why Backtest?
We then performed a backtest on the S&P 500, analyzing data from 1993 up until today in an attempt to find out if the Bullish Harami pattern can indeed be a viable trading strategy. Because it provides us with an opportunity to measure how the pattern would have fared in real market conditions in the past, we used backtesting.
Trading Rules
For our backtest, we set the following trading rules:
- Identify a Bullish Harami pattern.
- Ensure that the 5-day RSI level is below 40.
- Buy at the close of the second candle on encountering both the above and below conditions, hold for ten days.
Backtest Results
Analysis of the results coming out from the trading rules after applying it, we analyzed the outcomes. The average gain per trade was about 0.95% if sold after ten trading days, which is approximately double the return of random trading periods of the same length. The equity curve derived from these trades showed a steady upward trend, though not without fluctuations.
Win Rate of Bullish Harami
The win rate of trades was between 55% to 70%, depending on the holding period. Another important finding was that the longer the holding period, the better the win rate in trades with the Bullish Harami. Such a phenomenon can be explained by the overall trend of upward stock price momentum over time, especially in bull markets.
Application to Traders
Adding the Bullish Harami to Your Trading System
With regard to the successful implementation of the Bullish Harami in your trading system, consider the following:
- Combination with Other Indicators: It should be used with other technical indicators such as RSI or moving averages for better confirmation.
- Market Conditions: Observe the prevailing market conditions before you begin using the Bullish Harami pattern in your trading system. It has the potential to work well under different market conditions.
- Define Your Risk Tolerance: Establish how much risk you will take within each trade given your strategy and principles of risk management.