Harami Cross

The Harami Cross is a widely recognized candlestick pattern in technical analysis that can be instrumental in identifying potential reversals in a financial market’s price trend. The term “harami” itself is derived from the Japanese word for “pregnant,” which reflects the visual appearance of the pattern. The Harami Cross pattern is a specific type of the Harami pattern and constitutes a two-candle formation that signals a possible change in market direction. Given its significance and nuanced interpretation, this pattern is closely monitored by traders who employ algorithmic trading strategies, aiming to refine the precision of their entries and exits in the market.

Structure and Characteristics

The Harami Cross formation consists of two specific candlesticks:

  1. First Candlestick: This is a large-bodied candle that indicates a strong bullish (white/green) or bearish (black/red) move.
  2. Second Candlestick: This candle is a Doji, a candle where the opening and closing prices are nearly the same, creating a very small body. The Doji must be contained within the body of the first candlestick, signifying indecision among traders.

Bullish Harami Cross

A Bullish Harami Cross occurs in a downtrend and suggests a potential reversal to an uptrend. The first candle is a long bearish candle, showing that the sellers were in control. The next day, a Doji appears within the body of the previous candle, indicating indecision among market participants. The appearance of the Doji suggests that selling pressure may be diminishing, possibly leading to an upward reversal.

Bearish Harami Cross

A Bearish Harami Cross manifests in an uptrend and signals a possible shift to a downtrend. The first candle is a long bullish candle, highlighting control by the buyers. The following day features a Doji within the body of the first candle, showing a state of indecision. The presence of the Doji signifies a reduction in buying pressure, implying that a downward reversal could be near.

Interpretation and Trading Strategy

The Harami Cross is significant because it highlights a period of market indecision, which often precedes a reversal. Traders employing this pattern as part of their strategy generally look for confirmation before entering a trade:

  1. Confirmation: This could come in various forms, such as a gap in the direction of the anticipated reversal, high trading volume, or a subsequent candle that breaks the high or low of the Doji.
  2. Stop-Loss Placement: For a Bullish Harami Cross, typically a stop-loss is placed below the low of the first candlestick. For a Bearish Harami Cross, a stop-loss is often placed above the high of the first candlestick.
  3. Profit Targets: Traders may set profit targets based on Fibonacci retracement levels, previous support/resistance levels, or a fixed risk-to-reward ratio.

Algorithmic Trading Applications

In the context of algorithmic trading, the Harami Cross pattern can be codified into a trading algorithm to automate buy and sell decisions. Such an algorithm would typically include:

  1. Pattern Recognition: Using historical price data to identify the two-candle formation of the Harami Cross.
  2. Confirmation Requirements: Implement rules for additional confirmation before executing trades to filter out false signals.
  3. Risk Management: Incorporate automated stop-loss and take-profit rules to manage risk and lock in profits.
  4. Backtesting: Apply the algorithm to historical data to evaluate its performance and make any necessary adjustments.

Example: Algorithmic Trading Strategy

Step 1: Identify the Harami Cross pattern in historical price data.

def identify_harami_cross(data):
    patterns = []
    for i in [range](../r/range.html)(1, len(data)):
        if is_doji(data[i]) and within_candle_body(data[i], data[i-1]):
            patterns.append((data[i-1], data[i]))
    [return](../r/return.html) patterns

def is_doji(candle):
    [return](../r/return.html) abs(candle['close'] - candle['[open](../o/open.html)']) < 0.1 * (candle['high'] - candle['low'])

def within_candle_body([doji](../d/doji.html), previous_candle):
    [return](../r/return.html) ([doji](../d/doji.html)['high'] <= previous_candle['high'] and
            [doji](../d/doji.html)['low'] >= previous_candle['low'])

Step 2: Define confirmation criteria and trade execution rules.

def confirm_and_trade(patterns, data):
    trades = []
    for pattern in patterns:
        [index](../i/index_instrument.html) = data.[index](../i/index_instrument.html)(pattern[1])
        if confirmation(data, [index](../i/index_instrument.html)):
            action = 'buy' if pattern[0]['close'] < pattern[0]['[open](../o/open.html)'] else 'sell'
            stop_loss = data[[index](../i/index_instrument.html)+1]['low'] if action == 'buy' else data[[index](../i/index_instrument.html)+1]['high']
            [trade](../t/trade.html) = execute_trade(action, data[[index](../i/index_instrument.html)+2], stop_loss)
            trades.append([trade](../t/trade.html))
    [return](../r/return.html) trades

def confirmation(data, [index](../i/index_instrument.html)):
    if [index](../i/index_instrument.html) + 2 >= len(data):
        [return](../r/return.html) False
    [return](../r/return.html) data[[index](../i/index_instrument.html)+2]['close'] > data[[index](../i/index_instrument.html)+1]['high'] if data[[index](../i/index_instrument.html)+1]['close'] < data[[index](../i/index_instrument.html)+1]['open'] else data[[index](../i/index_instrument.html)+2]['close'] < data[[index](../i/index_instrument.html)+1]['low']

def execute_trade(action, entry_candle, stop_loss):
    [return](../r/return.html) {
        'action': action,
        'entry_price': entry_candle['[open](../o/open.html)'],
        'stop_loss': stop_loss,
        'timestamp': entry_candle['timestamp']
    }

Step 3: Backtest the algorithm on historical data.

historical_data = load_historical_data()
patterns = identify_harami_cross(historical_data)
trades = confirm_and_trade(patterns, historical_data)

for [trade](../t/trade.html) in trades:
    print([trade](../t/trade.html))

Real-World Applications and Tools

Algorithmic trading platforms and tools allow traders to implement and automate strategies based on the Harami Cross and other patterns. Some widely used platforms include:

Conclusion

The Harami Cross is a potent tool in the arsenal of technical analysts and algorithmic traders. By recognizing the pattern and understanding its implications, traders can anticipate potential market reversals and enhance their trading strategies. Integrating this pattern into an algorithmic approach allows for systematic and emotion-free trading, leveraging the speed and precision of automated systems to capitalize on market opportunities.