What Is Harami Cross?
The Harami Cross is a specific type of candlestick pattern used in technical analysis that signals a potential trend reversal. It is characterized by a large first candle that engulfs a smaller second candle, which must be a doji. This pattern suggests market indecision after a period of clear directional movement, often preceding a shift in market sentiment. The Harami Cross falls under the broader category of chart patterns, which analysts use to interpret price action and predict future price movements.
History and Origin
Candlestick charts, and by extension patterns like the Harami Cross, originated in 18th-century Japan. Their development is widely attributed to Munehisa Homma, a Japanese rice merchant who created a systematic method to analyze rice market trends. Homma recognized that trader psychology significantly influenced price movements and sought a visual way to capture this dynamic. His innovations laid the groundwork for candlestick charts, which became indispensable tools for tracking daily price action.7
These charting techniques remained largely confined to Japan until the late 20th century. In 1991, Steve Nison introduced Japanese candlestick charting to the Western financial world with his seminal book, "Japanese Candlestick Charting Techniques."5, 6 Nison's work popularized these visual tools, and they have since become a cornerstone of modern technical analysis across various financial markets, including equities, commodities, and foreign exchange.
Key Takeaways
- The Harami Cross is a two-candle technical analysis pattern indicating potential trend reversal.
- It consists of a large first candle followed by a smaller doji candle that is fully contained within the body of the first candle.
- The pattern signifies market indecision and a weakening of the preceding trend.
- It is often used in conjunction with other technical indicators to confirm potential reversals.
- Interpretation depends on the preceding trend; a bullish Harami Cross follows a downtrend, and a bearish Harami Cross follows an uptrend.
Interpreting the Harami Cross
The Harami Cross is interpreted as a signal of a potential shift in momentum. The large first candle indicates the continuation of the prevailing trend. However, the appearance of the small doji candle, fully contained within the previous candle's body, suggests that the market's conviction in that trend is wavering. A doji candle forms when the opening and closing prices are very close, indicating indecision between buyers and sellers. This indecision, especially after a strong directional move, can often be a precursor to a reversal.
For a bullish Harami Cross, the first candle is typically long and bearish, followed by a small doji. This implies that sellers were in control, but their dominance is now being challenged, and buyers are beginning to assert themselves, potentially leading to an upward price trend. Conversely, a bearish Harami Cross features a long bullish first candle followed by a small doji. Here, buyers previously controlled the market, but the doji suggests their strength is fading, and sellers may be preparing to take over, potentially initiating a downward trend. Traders often look for confirmation in the subsequent candle or using other chart patterns before making trading decisions.
Hypothetical Example
Consider a hypothetical stock, ABC Corp., which has been in a strong downtrend over the past few days, with its share price steadily declining.
On Day 1, ABC Corp. opens at $50 and closes at $45, forming a long bearish candle. This shows strong selling pressure dominating the market.
On Day 2, the stock opens at $45.20, trades as high as $45.50 and as low as $44.90, and then closes at $45.10. This creates a very small doji candle, whose entire body is contained within the large bearish candle of Day 1. The minimal difference between the open and close price, and the containment within the previous day's range, signals significant indecision among market participants after a period of decline.
This formation constitutes a bullish Harami Cross. A discerning investor might interpret this as an early sign that the selling pressure on ABC Corp. is subsiding and that a potential upward reversal could be imminent. They might then look for further bullish confirmation, such as a strong upward move on Day 3, before considering a long position. The indecision reflected by the doji, following the strong bearish candle, suggests a potential turning point in the market cycle.
Practical Applications
The Harami Cross is primarily applied within technical analysis as a tool for identifying potential shifts in market direction. Traders and analysts use it across various financial markets, including equities, foreign exchange, and commodities. It is commonly employed by those who aim to anticipate trend reversals and adjust their trading strategies accordingly. For example, a bearish Harami Cross observed after an uptrend might lead a trader to consider taking profits or establishing a short position, while a bullish Harami Cross after a downtrend might prompt thoughts of opening a long position.
Many professional trading platforms and analytical software incorporate automated recognition of candlestick patterns, including the Harami Cross, to assist traders in real-time market monitoring. Financial news services and data providers, such as Thomson Reuters, also offer technical analysis signals that often include interpretations of candlestick formations, demonstrating their widespread use in practical market analysis.4 For instance, the analysis might indicate buy or sell signals based on various indicators, with candlestick patterns contributing to the overall assessment of market conditions.
Limitations and Criticisms
While the Harami Cross can be a useful tool for identifying potential reversals, it has limitations, similar to other technical analysis patterns. One primary criticism is that candlestick patterns, including the Harami Cross, may not always reliably predict future price movements on their own. Studies have indicated mixed results regarding the consistent predictive power and profitability of candlestick patterns. For example, research published through Lund University found that some candlestick patterns, when tested independently, did not show significant predictive power or financial value for investors.3
Furthermore, technical analysis itself faces broader critiques, particularly from proponents of the Efficient Market Hypothesis (EMH). The EMH suggests that all available information is already reflected in asset prices, making it impossible to consistently "beat the market" using historical price data.2 The CFA Institute has also addressed the role of technical analysis, acknowledging its use while also highlighting ongoing debates regarding its effectiveness, particularly when used in isolation.1
The subjective nature of interpreting chart patterns can also lead to varied conclusions among different analysts. To mitigate these drawbacks, it is generally recommended to use the Harami Cross and other candlestick patterns in conjunction with other forms of analysis, such as fundamental analysis or additional technical indicators, to confirm signals and manage investment risk.
Harami Cross vs. Harami Pattern
The distinction between the Harami Cross and the broader Harami pattern lies in the second candle. Both patterns indicate a potential reversal, with the first candle being large and encompassing the smaller second candle. However, for a standard Harami pattern, the second candle can be any small candle whose body is entirely within the first candle's body, regardless of whether it represents indecision or a slight move in the opposite direction. In contrast, the Harami Cross specifically requires the second candle to be a doji (a candle with a very small or virtually non-existent real body, signifying that the opening and closing prices are almost the same). This doji emphasizes extreme market indecision, making the Harami Cross a potentially stronger reversal signal compared to a regular Harami, as it highlights a more pronounced stalemate between buyers and sellers after a prevailing trend.
FAQs
What does a Harami Cross indicate in trading?
A Harami Cross indicates a significant pause or indecision in the market following a strong trend. It suggests that the prior momentum is waning and a trend reversal could be imminent, prompting traders to look for further confirmation before making decisions.
Is a Harami Cross bullish or bearish?
The Harami Cross can be either bullish or bearish, depending on the preceding trend. If it appears after a downtrend, it is a bullish Harami Cross, suggesting a potential upward reversal. If it appears after an uptrend, it is a bearish Harami Cross, signaling a possible downward reversal. The direction of the potential reversal is opposite to the preceding trend.
How reliable is the Harami Cross pattern?
Like most chart patterns, the Harami Cross is not considered foolproof. Its reliability can vary depending on market conditions, the timeframe being analyzed, and the specific asset. Many analysts recommend using the Harami Cross in conjunction with other technical indicators or forms of analysis, such as support and resistance levels, to increase the probability of a successful prediction and manage risk management.