In the world of forex trading, candlesticks are a very important predictor of price action. Ability to recognise a candlestick pattern (especially the reversal patterns) is a skill that every forex trader must learn in order to gain a solid advantage in the markets. It is as important to trading as knowledge of medicines is to a doctor. You cannot isolate one from the other.
One of the candlesticks we will examine is a bearish reversal candlestick pattern known as the bearish harami. A bearish harami is formed when there is a large candlestick, followed by a second smaller candlestick. The two candlesticks occur in such a way that the second candlestick is enveloped within the vertical range of the first candlestick. As such, the high of candle 2 does not get to the high of candle 1, and the low of candle 2 does not get to the low of candle 1. The bearish harami can be formed by a bearish candle 1 and bullish candle 2, or a bullish candle 1 and a bearish candle 2. The most important factor is that the vertical range of candle 1 must envelop that of candle 2. The smaller the 2nd candlestick is, the stronger the signal.
The bearish harami can occur anywhere on the charts, but its greatest significance is when it occurs in an uptrend, right at the overbought zone (marked by Stochastics of RSI >75). So when using this candlestick formation as a signal to trade, it is important to note that it is only when it forms in an overbought zone during a significant uptrend that we would consider using it to set up a short trade. Chart showing the formation of bearish harami in the overbought region of an uptrend. Look at the chart above. It shows clearly the bearish harami that has formed in an uptrend, at the overbought zone. These two signals is a clear indication to sell the asset at the open of the next candle. The signal is reinforced of it occurs at a resistance level.The same chart showing the overbought levels at which bearish harami formed.
The fall in price after 2 candles was indeed a very dramatic one that would have yielded the trader an astonishing 7,120 pips. This instrument was spot gold (XAU/USD) which is famous for its extremely high volatility, especially during periods of economic turmoil.
This goes to demonstrate how a trader can combine a few technical indicators along with candlestick patterns to make some good money for himself.
There is candlestick recognition software available for free, but they ultimately cannot substitute a trader’s skill in knowing how to identify and utilize candlestick patterns to profit from the forex market.