A failing bearish harami pattern

Figure 8-6 provides a solid example of how the bearish harami can fail, because it happens twice in a row on this chart. This double dose of pattern failure should open your eyes to what can go wrong when the bearish harami doesn't play out favorably.

Figure 8-6 is a chart of the futures contract that trades based on the price of crude oil. As you can see, the bearish harami appears twice in a row. The setup day of each pattern is a nice up day (in the middle of an uptrend), and both of the signal days are inside days with dark candles that indicate bearish trading. These two patterns have something else in common, as well. They both fail immediately! Both patterns crash and burn the day after they appear on the chart. If you trade these patterns and take a small loss, I bet the next time a bearish harami rears its head, you think twice before putting on a trade.

The setup day of the second bearish harami on this chart is actually the same day that the first pattern fails. I define a bearish harami failure as a violation of the high of the signal day. This violation occurs on both patterns in Figure 8-6, and both fail the day after the pattern appears. (My definition for failure on a bearish harami pattern isn't the only one; a failure can also be a violation of the close of the setup day, or even the high of the setup day.) After trading achieves any of these levels, the prevailing uptrend becomes apparent. You need to figure out your level of risk tolerance and decide for yourself what level to use as a failure point for the bearish harami, but using my definition (the violation of the signal day's high) is a good starting point. This level is a good one to place a stop order to avoid a loss getting out of control.

Figure 8-5:

successful bearish harami working on a chart of the RTH ETF.

Figure 8-5:

successful bearish harami working on a chart of the RTH ETF.

Figure 8-6:

A bearish harami pattern failing twice on a crude oil futures chart.

Figure 8-6:

A bearish harami pattern failing twice on a crude oil futures chart.

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