Confessions of a Forex Trader - Part V: Charting the Anomalous - The Harami

Expert: Mihai Nichisoiu, Private currency speculator at Mihai Nichisoiu

Topics to be covered during the session:

• Charts and psychology of the Harami
• The Harami: technical anomaly within solid establishment of trends
• Technical analysis in its purest form

Who is Mihai Nichisoiu?

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 consulting a small number of long-term private connections.

FXstreet.com has been hosting a short, frequently updated market report signed by Mihai Nichisoiu eversince January 2004. Mr. Nichisoiu can be contacted via his recently established, personal website MihaiNichisoiu.com.

Session Material:

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 I was suggesting in the introduction to my latest live appearance here, 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 as well can be encountered 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 behaviour associated with that particular pattern became apparent in June 2004 (copyright: NetDania.com).

CHART: file attached 'audjpy'

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).

CHART: file attached 'eurusd'

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).

CHART: file attached 'eurjpy'

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).

CHART: file attached 'cadjpy'

One other recent example is the all the more interesting occurence 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 model account with an welcome and reasonable capital gain (following daily chart of the EUR/GBP, copyright: NetDania.com).

CHART: file attached 'eurgbp'

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.

Session Speach:

FXstreet Moderator (Nov 7, 2006 9:37:36 AM)
Welcome to FXstreet.com Q&A Forex Session. Today’s session will start in 10 minutes.

FXstreet Moderator (Nov 7, 2006 9:37:57 AM)
Meanwhile we recommend you to read the speech material that you can find on your left window.

FXstreet Moderator (Nov 7, 2006 9:38:09 AM)
This Q&A Sessions allows users to start asking live questions from the very first moment of the chat.

FXstreet Moderator (Nov 7, 2006 9:38:23 AM)
Please prepare any questions you may have for the expert. Thank you for joining today’s Q&A Session.

FXstreet Moderator (Nov 7, 2006 9:45:34 AM)
Welcome to the Session. Today I am delighted to welcome our guest speaker Mihai Nichisoiu, Private currency speculator at Mihai Nichisoiu.

Mihai Nichisoiu (Nov 7, 2006 9:46:43 AM)
Hello, and welcome.

Mihai Nichisoiu (Nov 7, 2006 9:47:37 AM)
I am Mihai Nichisoiu.

Mihai Nichisoiu (Nov 7, 2006 9:47:54 AM)
I first wish to thank everybody actively attending this Session, or reading in the aftwards.

Mihai Nichisoiu (Nov 7, 2006 9:48:19 AM)
With my latest live appearance here, and today's Session, I wanted to attach some practicality to the notions of risk and leverage that were debated in the earlier parts of the series 'Confessions of a Forex Trader'.

Mihai Nichisoiu (Nov 7, 2006 9:48:41 AM)
After all, I state on many occasions that the ways I see financial markets of certain liquidity - including but certainly not limited to currency markets - are almost purely technical.

Mihai Nichisoiu (Nov 7, 2006 9:49:09 AM)
It will, however, be wrong to assume I totally or to any significant extent owe my past successes and failures as a trader to technical analysis. To me that is more than just a note of disclaimer.

Mihai Nichisoiu (Nov 7, 2006 9:49:59 AM)
Last time I was present in a Q&A Live Session here on FXstreet.com, I introduced and talked at large about the '2B bottom/top' type of reversals, also known as the 'bear trap' and 'bull trap'.

Mihai Nichisoiu (Nov 7, 2006 9:50:39 AM)
For today, my observations and illustrations focus on another one of my most favourite chart patterns and trading setups, the 'harami' - as more or less recently, some of my most notable currency speculations coincided with such a particular technical occurence.

Mihai Nichisoiu (Nov 7, 2006 9:51:36 AM)
From this moment on I think I will catch up with some of the live questions that may be addressed.

FXstreet Moderator (Nov 7, 2006 9:53:08 AM)
You can send your questions now. Thank you!

abror_aa (Nov 7, 2006 9:55:40 AM)
Do you focus on Weekly/Daily charts mainly or only? (Looking at the charts you have attached)

Mihai Nichisoiu (Nov 7, 2006 9:58:14 AM)
Yes, as a matter of fact I focus on the daily charts, alongside investigating the weekly and even monthly chart timeframes. I do not have an intraday agenda, for that matter.

Guest_mike-22 (Nov 7, 2006 10:02:19 AM)
How do you indetify an 'anomalous' element in a trend?

Mihai Nichisoiu (Nov 7, 2006 10:04:25 AM)
I do not have a precise formula, especially since each and every situation in which an 'anomaly' occurs stands on its own technical and/or fundamental ground.

Mihai Nichisoiu (Nov 7, 2006 10:06:27 AM)
For example, on May 18th (current year) in the EUR/GBP market, there was in fact a double 'anomaly' - the 'harami' occuring in a downtrend that had accelerated on May 17th, and that May 17th French official's statement that just did not match with the price action I saw over the subsequent 24 hours.

Mihai Nichisoiu (Nov 7, 2006 10:08:00 AM)
On the other hand, last year on October 4th the 'harami' that became apparent on that day in the EUR/USD to me was a self-sufficient factor that made me decide to buy with no hesitation.

Mihai Nichisoiu (Nov 7, 2006 10:09:14 AM)
Some other times, the 'anomaly' could be a central banker's attempt to support a currency although technically there may be a mounting overhead supply.

Mihai Nichisoiu (Nov 7, 2006 10:10:38 AM)
The fact is, I never make an attempt to precisely define an 'anomaly' beforehand. Sometimes it is something I see, some other times it may be something I hear even accidentally.

Mihai Nichisoiu (Nov 7, 2006 10:14:35 AM)
Feel free to ask further live questions.

YANGPENGER (Nov 7, 2006 10:17:53 AM)
eurusd formed a daily harami yesterday,but for usdchf it is not.would you trade the harami? thank you

Mihai Nichisoiu (Nov 7, 2006 10:20:19 AM)
I do not currently hold a long EUR/USD position, - which is not to say the pair cannot go higher.

Mihai Nichisoiu (Nov 7, 2006 10:21:45 AM)
With regard to the same EUR/USD market, I think I would have been more interested in the 'harami' pattern completed by the day of October 16th, for that matter.

beach (Nov 7, 2006 10:22:39 AM)
if harami is considered a low reliability signal--can you give examples of small, subltle or unassuming signs you look for

Mihai Nichisoiu (Nov 7, 2006 10:25:34 AM)
A 'low-reliability' technical signal in a rangebound market may become a very high-reliability warning in an overextending market environment.

Mihai Nichisoiu (Nov 7, 2006 10:27:52 AM)
You may have already noted that, usually, chart pattern technical analysis - either Western or Far Eastern - rate large-range signs as having a high-reliability, and do small-range patterns as not quite accurate in calling for a trend reversal.

Mihai Nichisoiu (Nov 7, 2006 10:30:32 AM)
Then, I am not extremely comfortable with discussing notions like 'accuracy' or 'reliability', either high or low, as they are debated by a vast segment of market participants. For one, I think searching for 'high accuracy' technical rules is being severely flawed - not only for technical considerations, but also (or especially) risk related ones.

Mihai Nichisoiu (Nov 7, 2006 10:35:28 AM)
But to being more to the point of your question - some of the technical 'anomalies' I regularly spot can be found in perhaps any book that focuses on chart patterns. A 'harami' or a 'bear trap' could be the small, subtle, unassuming signs I am ready to discover - but first and foremost, their 'small, subtle' being is judged relative to a more general establishment of the given market, like for example when a trend has already become parabolic.

FXstreet Moderator (Nov 7, 2006 10:36:01 AM)
That’s all we have time for Today .Thank you very much for that Mihai.

Mihai Nichisoiu (Nov 7, 2006 10:37:33 AM)
Thank you again for participating, or reading the transcript in the afterwards.

Mihai Nichisoiu (Nov 7, 2006 10:37:54 AM)
Next and last part of the series 'Confessions of a Forex Trader' will develop as a Q&A Live Session here on FXstreet.com during this month, on November 22nd.

Mihai Nichisoiu (Nov 7, 2006 10:38:19 AM)
For anything further, you can contact me via my personal website MihaiNichisoiu.com.

FXstreet Moderator (Nov 7, 2006 10:39:28 AM)
Thank you all for your participation. See you soon!