Technical analysis Chart analysis

The Harami Pattern. Does it Engender a New Trend?

Elena Berseneva 29 december 2021 198 4

In the proposed study, we will research the Harami graphical pattern.


In his book "Japanese Candlestick Charting Techniques", Steve Nison characterizes this pattern as follows:


"The Harami model is a candlestick with a small body that is within a relatively big body of the preceding candlestick. 'Harami' is an ancient Japanese word which means 'pregnant'. A big candlestick is a 'mother', and a small one is a 'child' or 'fetus.' "


This pattern is believed to be reversal.


We will check if it is true by using a large volume of historical data.

Hypothesis
To conclusion

The Harami pattern belongs to trend reversal patterns.

To conclusion

The Harami model consists of two candlesticks.


The first candlestick, which is rather big, corresponds to the current trend. That is, if the trend is upward, then this candlestick will be white. And if the market was falling before, then the first candlestick of the model will be black.


The second candlestick is small, filled with the opposite color. The necessary condition is for this candlestick to be completely absorbed by the first one. That is, to be inside its body.


The first candlestick is "pregnant", and the second small one is a child inside it, or a "fetus". The result of the "delivery" will be appearance of a new trend.


There are two types of Harami: bullish (formed on a downtrend) and bearish (formed on an uptrend) (Fig. 1).

Bullish Harami foreshadows growth of the market, and when it appears, you need to consider placing a buy-to-open order.


For bearish Harami it's the exact opposite: the trend after its appearance is predicted to be downward, and a sell-to open order should be placed.



Event Detection Method

The pattern on the charts will be defined as follows (for bullish Harami):


  • Identify a downtrend (we determine gradually decreasing lows of several candlesticks):

Low3 < Low4

Low2 < Low3


  • We find a combination of two candlesticks, the first one (Black) is relatively big, it corresponds to the current trend. The second candlestick (white) is small, filled with the opposite color. The necessary condition is for this candlestick to be completely absorbed by the first one, i.e. be inside its body. The shadows of the long candlestick should cover the shadows of the small one:

Close1 > Open1 (bullish Harami)

Close2 < Open2 (the second bearish Harami candlestick)

Low2 <= Low1 (Harami is completely absorbed by candlestick 2)

High2 > High1 (Harami is completely absorbed by candlestick 2)

Close2 <= Open1 (the Harami body is completely absorbed by candlestick 2)

Open2 > Close1 (the Harami body is completely absorbed by candlestick 2)

PP < PP Max(the overlap percentage of the bodies should be less than the set value: the smaller the Harami body, the stronger the signal)


  • A buy-to-sell order can be placed once the pattern has been formed.


The formation of bullish Harami is described above. For bearish Harami, the situation is mirrored.


The signals generated by the Harami model will be tested on a large volume of historical data of various financial instruments and in the context of two timeframes.


In addition, the Harami model will be tested in three of its combinations, namely by adjusting the conventional parameter, the overlap percentage of the candlesticks. For convenience, let us call it PP.


The overlap value of the PP is calculated with the following formula:


PP = (High1 - Low1)) * 100 / S

where S = Max(Open2, Close2) – Min(Open2, Close2)


Visually, the Harami model with the above parameter looks as follows (Fig.2):

The figure shows a bullish Harami formed on a downtrend, the situation is mirrored for an uptrend.


What does the conventional Harami parameter mean?

  • The PP characterizes the size of the candlesticks relative to each other. The smaller the OP of the candlesticks, the shorter the body of the "fetus" (white candlesticks in Fig. 2) compared to the body of the "mother" (black candlesticks in Fig. 2) and the Harami pattern is even more pronounced.


Now let us discuss the conditions for opening and closing a trading position.


Conditions for opening a trading position.

After the pattern is formed, a position is placed on the open of the next candlestick:

  • On bullish Harami – buy;
  • On bearish Harami – sale.


Closing a position:

In all situations, the lifetime of the position is 5 or 10 candlesticks.

Data used

Next, we will determine the list of financial instruments and their timeframes on which the trading signal will be tested. This sample will be presented by:


  • 23 currency pairs (Forex);
  • 6 commodity futures (Commodities);
  • 2 stock indices (Indices);
  • 30 stocks included in Dow30 (Stocks).


Timeframes used:

  • H1 (1 hour) - the history of 5 years,
  • D1 (1 day) - the history of 10 years.


The sample is 2,124,495 values.

After defining all the conditions and setting the necessary parameters, let us start testing!



Analysis of the results obtained


The results are first estimated by the size of the sample obtained:



For a timeframe of 1 hour (H1):


Type of financial instruments
Number of candlesticks
Number of events
Forex
994755
39510
Commodities
191850
7425
Indices
87600
3621
Stocks
628011
19604



For a daily timeframe (D1):


Type of financial instruments
Number of candlesticks
Number of events
Forex
83950
4082
Commodities
21900
915
Indices
7300
272
Stocks
109129
3860


Total: 2,124,495 candlesticks and 79,289 events (Harami patterns).



Next, let us look at the share of Harami in the total number of initial candlesticks in the aggregate for two timeframes:


Harami Parameters
Forex
Commodities
Indices
Stocks
Average
PP 25
0.35
0.36
0.38
0.29
0.32
PP 50
0.71
0.68
0.73
0.57
0.64
PP 75
0.96
0.86
0.95
0.73
0.84


Based on the results of the grouping, it can be concluded that regardless of the type of financial instruments, the distribution of Harami is approximately the same, namely:

  • Harami with the parameters of PP 25 ranged from 0.29 to 0.38% of the total number of candlesticks;
  • Harami with the parameters of PP 50 ranged from 0.57 to 0.73% of the total number of candlesticks;
  • Harami with the parameters of PP 75 ranged from 0.73 to 0.96% of the total number of candlesticks.


Also note that the more expressed the Harami pattern, the smaller its share in the total number of candlesticks.


Now let us have a look at the outcome of processing trading signals obtained as a result of the generated Harami.


The results will be evaluated according to two criteria:

  • Momentum (m) – reflects the average percentage increment of quotations of financial instruments at the time of closing positions, in %. A positive value of the momentum indicates the profitability of signal processing, a negative value indicates running at a loss.
  • SPP – the Share of Profitable Positions, %.



Momentum in % and the SPP in % in terms of the periods of holding positions, timeframes and Harami parameters:


Indicator
5th candlestick
10th candlestick
H1
D1
PP 25
PP 50
PP 75
m
-0.03
-0.04
-0.003
-0.07
-0.06
-0.02
-0.03
SPP
49.5
49.4
50.1
48.8
49.5
49.4
49.4



Momentum in % and the SPP in % by types of financial instruments:


Indicator
Forex
Commodities
Indices
Stocks
m
0.01
-0.13
0.06
-0.06
SPP
49.3
48.2
50.3
49.7


9 out of 11 average values of the momentum parameters are negative.


At the same time, some features can be highlighted.



To do this, we will visually present the results in the form of momentum distribution (m) relative to each parameter under consideration (position retention period, timeframe, Harami parameters (PP), type of financial instruments):

The diagrams above represent the distribution of momentum depending on the considered parameters. Each diagram consists of two parts: a "box" and "tails" or "whiskers". 50% of the observed values are placed in the box, the remaining 50% are represented by tails. The end of the lower tail represents the smallest of the observed values, the end of the upper tail represents the largest. The cross shows the average value.


The analysis of the results allows us to make the following preliminary conclusions:

  • fixing a position on the 5th candlestick is slightly less unprofitable compared to fixing on the 10th candlestick;
  • the average value of the momentum on the hourly timeframe is higher than on the daily one, which indicates less loss-making performance of the signal on the hourly charts;
  • the momentums are approximately the same at different values of the conventional Harami parameter;
  • the greatest momentum among financial instruments is noted for Indices.


Let us look at the results in the context of the following parameters: time of holding positions, timeframes, the Harami parameter (overlap percentage) and types of financial instruments.



Let us use the following symbols:


"H1 / 5" – closing a position on the 5th candlestick when working on a timeframe of 1 hour;

"H1 / 10" – closing a position on the 10th candlestick when working on a timeframe of 1 hour;

"D1 / 5" – closing a position on the 5th candlestick when working on a timeframe of 1 day;

"D1 / 10" – closing a position on the 10th candlestick when working on a timeframe of 1 day;

SPP – the Share of Profitable Positions, %.

OP - the Overlap Percentage, %;



The number of Harami, Momentum in %, the share of profitable positions in % in terms of the periods of holding positions, timeframes and types of financial instruments with an overlap percentage of less than 25


PP 25
Indicator
Stocks
Indices
Commodities
Forex
All
H1 / 5
Quantity
3483
655
1390
6683
12211
Momentum
-0.019
0.003
-0.099
0.004
-0.028
SPP
50.7
51.9
48.9
50.8
50.6
H1 / 10
Quantity
3482
655
1389
6683
12209
Momentum
-0.051
0.033
0.009
0.004
-0.001
SPP
48.7
53.4
51.5
51.0
50.0
D1 / 5
Quantity
784
59
189
850
1882
Momentum
-0.096
0.155
-0.333
-0.021
-0.074
SPP
50.0
46.9
44.1
48.8
48.9
D1 / 10
Quantity
783
59
189
848
1879
Momentum
-0.215
0.027
-0.479
0.074
-0.148
SPP
49.5
50.1
46.7
47.7
48.6



The number of Harami, Momentum in %, the share of profitable positions in % in terms of the periods of holding positions, timeframes and types of financial instruments with an overlap percentage of less than 50


PP 50
Indicator
Stocks
Indices
Commodities
Forex
All
H1 / 5
Quantity
6983
1288
2668
13936
24875
Momentum
0.023
0.009
-0.057
0.001
-0.006
SPP
50.3
52.4
48.9
50.1
50.2
H1 / 10
Quantity
6982
1288
2667
13935
24872
Momentum
0.017
0.015
-0.020
0.001
0.003
SPP
49.6
50.8
49.5
50.2
49.8
D1 / 5
Quantity
1393
97
319
1423
3232
Momentum
-0.053
0.152
-0.110
-0.036
-0.012
SPP
48.8
47.6
47.5
47.9
48.3
D1 / 10
Quantity
1392
97
319
1420
3228
Momentum
-0.083
0.065
-0.148
0.044
-0.031
SPP
50.5
47.8
47.5
48.5
49.4



The number of Harami, Momentum in %, the share of profitable positions in % in terms of the periods of holding positions, timeframes and types of financial instruments with an overlap percentage of less than 75


PP 75
Indicator
Stocks
Indices
Commodities
Forex
All
H1 / 5
Quantity
9138
1678
3367
18891
33074
Momentum
0.018
0.005
-0.050
0.001
-0.007
SPP
50.3
52.2
48.7
49.9
50.0
H1 / 10
Quantity
9136
1678
3366
18889
33069
Momentum
0.008
-0.007
0.012
0.003
0.004
SPP
49.4
50.1
49.6
49.9
49.6
D1 / 5
Quantity
1683
116
407
1809
4015
Momentum
-0.071
0.187
-0.198
-0.020
-0.026
SPP
49.3
49.9
48.0
48.2
48.8
D1 / 10
Quantity
1682
116
407
1806
4011
Momentum
-0.167
0.128
-0.075
0.011
-0.026
SPP
49.6
50.3
47.7
48.7
49.1



Let us summarize the results obtained using diagrams:

The results obtained allow us to make the following conclusions.


The largest momentum of 0.004% is shown by signals generated by the Harami pattern on the timeframe of 1 hour and with the Harami parameters se to the PP being less than 75% and fixation of the position at the 10th candlestick.


In general, the momentum generated by the signal of the Harami model is insignificant, regardless of the degree of expression of the model itself.

Conclusion

Summing up, we can conclude that the signal of the Harami pattern does not bring profit in the generally accepted interpretation.


The influence of the Harami pattern on the market has not been established.

Detailed results are presented in the appendix:

XLSX (0.34 MB)Application to the article 'Harami Pattern. Does it create a new trend' eng.xlsx

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