A harami cross refers to a Japanese candlestick pattern that comprises a large candlestick that moves in the trend’s direction, followed by a small doji candlestick. A huge candlestick that moves in the trend's direction is followed by a little doji candlestick to form a Japanese candlestick pattern known as a harami cross. The body of the previous candlestick entirely encloses the doji. The harami cross pattern indicates a potential reversal of the preceding trend. The pattern formed could be either bearish or bullish.  Bearish patterns indicate a potential price reversal to the downside, whereas bullish patterns indicate a potential price reversal to the upside.

Understanding the Harami Cross

A bullish harami cross pattern appears following a downtrend. To indicate that the sellers are in charge, the first candlestick is a long down candle. The second candle, a doji, opens above the previous day's closing and has a constrained range. The closing point of the Doji candlestick is near its opening price. The real body of the preceding candle must entirely enclose the Doji.

The doji indicates some hesitation on the part of sellers. Usually, traders won't act on a pattern until the price moves upward during the course of the following several candles. That is known as confirmation. After a doji, the price may occasionally stop for a few candles before rising or falling. The price may be moving upward when it rises over the first candle's opening.

A bearish harami cross appears followed by an uptrend. The first candlestick indicates that buyers are in control and is in the form of a long-up candle. Doji appears after it and indicates hesitancy from the buyer’s side. Once again, the real body of the preceding candle must entirely enclose the Doji.

The price drop after a pattern confirms that particular pattern. On the other hand, an increase in price after doji indicates invalidation of the bearish pattern.

Harami Cross Enhancers

Some traders may take action as soon as a bullish harami cross forms. On the other hand, some wait for confirmation. An upward price movement that follows the pattern is confirmed. Traders could also give more importance to a bullish harami cross at a significant support level or relevance, in addition to confirmation. If it occurs, there is a higher likelihood of a stronger upward price movement, particularly if there is no nearby resistance overhead.

Traders can also look for confirmation of a move higher from other technical indicators, including the relative strength index (RSI) rising from oversold territory.

Some traders prefer to wait for the price to move lower in accordance with a bearish harami cross before acting on it. The pattern can also be more noteworthy if it appears close to a key resistance level. The bearish price move may be supported by additional technical indicators, such as an RSI going lower from the overbought area.

Trading the Harami Cross Pattern

The harami cross is not required to be exchanged. Some traders merely use it as a warning to keep an eye out for a reversal. If a bearish harami cross develops and the price begins to decline after the pattern, a trader who is already long may take profits. Conversely, if a bullish harami cross develops and the price begins to rise shortly after, a trader holding a short position might try to close it out.

Whenever the harami cross shows, some traders can decide to open trades. A stop loss might be set below the low of the doji or below the low of the first candlestick when buying on a bullish harami cross. Traders may decide to enter a long position when the price rises above the opening of the first candle.

A stop loss can be positioned above the high of the doji or above the high of the opening candle when beginning a short position. When the price falls below the first candle's open, this is one potential entry point.

Profit targets are missing from harami cross patterns. As a result, traders need to employ other ways to decide whether to close off a deal or not.

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