Catch Market Reversals Using This Chart Pattern

I look at markets of certain liquidity - including but not limited to currency markets - in ways which are almost purely technical. My effective participation in these markets, however, can be extremely rare and infrequent.

As mentioned in the introduction to my previous article, I manifest a strong interest for markets getting overextended. As a matter of fact, I always seek to find out whether a particular chart event could get 'out of hand', or has already started behaving in an overreacting manner. Stable situations never really appeal to me.

Indeed, I never make an attempt to adapting myself to stable, neutral situations. I feel so much better when conditions become overstretched to the point the market involved begins feeding on its own frenzy.

However, neither a constant interest for making market observations, nor the existence of overextending conditions do not automatically translate into the act of betting. It is not until I am spotting an 'anomalous' element in the otherwise solid establishment of a trend, that I may decide to bet against that trend.

I constantly monitor the markets (charts and the financial media altogether) in search for what I may call 'anomalies'.

I become even more interested when such 'anomalies' - once making themselves readable on charts - are fast in their developing as small, unassuming signs. Alongside the '2B bottom/top' reversals, the appearance of a 'harami' may as well qualify for shaping an 'anomaly' as within the framework described above.

While investigating and illustrating candlestick patterns, the legendary website StockCharts.com defines the 'harami' as follows: 'A two day pattern that has a small body day completely contained within the range of the previous body, and is the opposite color'.

According to Candlesticker.com, a bullish 'harami' pattern is 'characterized by a small white real body contained within a prior relatively long black real body', while a bearish 'harami' pattern is 'a two-candlestick pattern composed of a small black real body contained within a prior relatively long white real body.'

On the 'Western' side of chart pattern analysis, the 'harami' is known as the 'inside bar', which daCharts.com designates as 'a bar which is completely within the range of the preceding bar, i.e. it has a higher low and lower high than the bar immediately before it'.

There are also slight variations of the 'harami' pattern - for example, what Far Eastern chart pattern analysis names the 'homing pigeon', or rather the 'harami' could represent the first ingredient in a far more complex chart pattern - for instance, in the 'three inside' candlestick formations, or the '2B' type of reversals.

A real case illustration of a 'harami' is the following snapshot of a weekly chart of the AUD/JPY, on which price behavior associated with that particular pattern became apparent in June 2004 (copyright: NetDania.com).



More or less recently, some of my most notable currency speculations coincided with the appearance of a 'harami'.

One of those experiences came last year in early October. At the time I was monitoring a steadily descending movement of the EUR/USD, that kept the pair's bears busy for the whole month of September. The pair fell from around 1.2600, to testing the round 1.19 on October 3rd - and I was already in search for speculating counter to that down movement.

The 'harami' of October 4th (daily chart wise) then provided me with a small sign suggesting the selling pressure might have come to a temporary exhaustion, and brought about a decent opportunity to buy in terms of reward versus risk.

The long EUR/USD position I took on October 4th had attached an extremely tight initial stop-loss order - its size was around 20 pips. Almost instantly after taking that long, a remarkable wave of buying erupted all of a sudden, taking the pair almost 300 pips north to testing 1.2200 in just 48 hours - and making my position display an interim ratio of reward / risk of around 15:1 within a remarkably short period of time.

Interestingly (but nonetheless essential to how I perceive very specific events unfolding at very specific times in highly liquid financial markets) - there was not a single economic or otherwise piece of news, major or minor, scheduled or eventually being wired on those two days of October 5th and 6th (following daily chart of the EUR/USD, copyright: NetDania.com).



An almost identical 'harami' became readable in the USD/JPY last year on May 5th (again, daily chart wise), just ahead of a Friday of a US non-farm payrolls release. Bulls took over instantaneously, pushing the pair 400 pips upwards over just less than a month time - but it eventually turned out that May 5th proved one of the greatest inflection points that this USD major pair had seen over the course of 2005.



The day of February 3rd (of current year) presented me with a 'harami' in the EUR/JPY market (daily chart wise), and a decent opportunity to sell this JPY cross with, again, a very tight initial stop-loss (as measured in number of pips).

Just 5 days after the entry, my short position was closed out at an achieved ratio of reward / risk of 7:1 (following daily chart of the EUR/JPY, copyright: NetDania.com).



A similar 'harami' appearance (again, daily chart wise) could have been observed in another JPY cross, the CAD/JPY, on September 1st (of current year) - and which drove the pair instantly lower, and kept it on bearish grounds over the subsequent days (following daily chart of the CAD/JPY, copyright: NetDania.com).



One other recent example is the all the more interesting occurrence of a 'harami' in the EUR/GBP market on May 18th (of current year). At that time, during first half of May, I did have some observing interest (although not much) for the down movement that was slowly taking place in the EUR/GBP.

Then, on May 17th the EUR fell terribly versus both the GBP and the CHF. I checked some of the financial media, and it looked like the French Finance Minister had just talked down what particularly during those weeks was considered an un-wanted strengthening of the Euro. On that day, I was ending my daily letter to some private connections writing that although my generic interest for that period was to position myself in one of the main USD markets, actually the very next trading opportunity could surprisingly occur either in the EUR/GBP or a JPY cross.

In the light of that freefall the EUR/GBP saw on May 17th, alongside that French official's statement - well, the 'harami' that would shape the ensuing 24 hours appeared to me as an intriguing anomaly.

It was not only that 'harami' gradually becoming apparent in the EUR/GBP (daily chart wise) that was seriously catching my attention - but another one of the Euro's crosses, the EUR/CHF, stamped its daily chart on that same day of May 18th with a '2B bottom' sort of reversal.

Instantly I knew it was time to buy, and buy aggressively. The result of my long EUR/GBP position taken on May 18th, although not spectacular in its raw measure of pips, did provide my accounts with an welcome and reasonable capital gain (following daily chart of the EUR/GBP, copyright: NetDania.com).



I happen to know that many technical analysts across the board rate the 'harami' as rather a low-reliability signal of reversal. That may indeed be correct on a general note, however there are two very personal premises that I could add to this 'reliability' issue.

Firstly, the chart position and timing of a certain technical sign (including but not limited to a 'harami') relative to the establishment of a trend that sign may be endangering are to me far more important than the signal itself.

The second premise relies on my constant search for unassuming signs, very small, very subtle - which to me has major risk implications once I decide stepping in betting.

Mihai Nichisoiu started to trade currencies first in the local futures market, then in early 2002 moved to dealing in the wide foreign exchange. Since the beginning of 2004, Mr. Nichisoiu has become mainly engaged in building a personal long-term track record in the sense of posting high rates of return only if at the expense of tight and rigid approaches of risk. Mr. Nichisoiu won the August 2005 edition of a popular global demo trading contest, after constantly achieving top rankings during an 11-month long participation. As a currency speculator, Mr. Nichisoiu is also actively involved in managing and providing counseling and advisory to a small number of long-term private connections.

Mihai Nichisoiu can be contacted via his recently established, personal website www.mihainichisoiu.com.