Notice how the Bearish Harami formation in ADM put the brakes on the uptrend. As a candlestick trader, you are now privy to the fact that this formation leads to a possible trend reversal. Upon seeing the gap down on the next day, there is virtually nothing to bolster the confidence of the bulls. Shorting at this point would have been a correct execution of trading strategy.
The Bearish Harami signal is found at the top of an uptrend.
In order for the Bearish Harami signal to be valid, the following conditions must exist:
The stock must have been in a definite uptrend before this signal occurs. This can be visually seen on the chart.
The second day of the signal should be a dark candle opening below the Close of the previous day and closing above the Open of the previous day’s white candle.
The following Figure shows a Bearish Harami formation. Where do most novice investors buy? At the top of a trend! When they see that all the people and their relatives have bought the stock, they no longer can afford to not own it. This situation leads to a long white candle. This is the moment that smart money dumps their position. They have made their profit and will move on. The amateurs are left holding the bag. If the bears continue their dominance after the signal formation, the bulls will step away and the downtrend will accelerate.
Chart courtesy stockcharts.com
Chart courtesy icharts.in
Notice the Bearish Harami in SAIL shown below. The rally which started from a Bullish Harami in early October was stopped by a Bearish Harami formation. Stochastics were in overbought conditions creating a high probability reversal scenario. The stock opened lower the next day and closed with a decisive bearish candle confirming the candlestick reversal signal. This was an excellent short entry point for a candlestick trader.