How to Make Money Trading with Candlestick Charts

Bearish Harami signal

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Criteria
In order for the Bearish Harami signal to be
valid, the following conditions must exist:
The stock must have been in a definite up
trend before this signal occurs. This can
be visually seen on the chart.
The second day of the signal should be
black and the body should be completely
engulfed by the previous day’s white
candle body.
Why the Reversal Works
Consider a stock trending up. As is most
often the case, the novice investors and

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traders buy exuberantly at the top creating the
long white candle. However, due to some
news or change in perception after market
hours, the stock becomes less desirable to
own. The next day the stock gaps down and
smart money starts selling. The bears are
able to close the candle down towards the
lower range of the previous day. This makes
the bulls nervous. Those who have recently
bought the stock in the hope that it will keep
going up are now on the edge. They are
waiting to see what happens the next day. If
the bears are still in the stock the next day,
the selling continues and the stock starts
heading lower. Those with recent long
positions start selling to get out with a small
loss and along with the bears shorting, the
stock tumbles down.

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The following conditions can make the
Bearish Harami signal more compelling to
short:
The longer the white engulfing candle
and the black engulfed candle, the higher
the chance that the trend will be
reversed.
There is heavy volume on either of the
two days of the signal formation.
Stochastics are in an overbought
condition.
The deeper the black candle closes into
the white candle body, the higher the
probability of reversal.
You will notice on some of the charts that the

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second day of the signal (the engulfed
candle) is one of the one-day reversal
signals. In cases of a Bearish Harami, it
could be a Hanging Man or a Shooting Star,
or even a Doji.
Conversely, in cases of a Bullish Harami, it
could be a Hammer or an Inverted Hammer
or a Doji. This adds weight to the fact that
reversal is about to happen. When you see
more than one candlestick signal at any point
in a trend indicating that a trend reversal is
possible, take notice immediately!
Figure 8.3
 shows a Bullish Harami formation
in Hindustan Motors.

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Figure 8.3: