Harami and inside bars: the small candle inside the big one
The engulfing pattern reversed the previous candle. The harami is the opposite relationship: a large candle followed by a small one that fits inside it. The word means pregnant in Japanese, and the picture is a big body carrying a small one. What it records is a sudden loss of momentum. One period moved a long way; the next period moved almost nowhere and stayed inside the first. The inside bar is the price action version of the same idea, defined by ranges rather than bodies, and it is read less as a reversal than as compression, a market that has paused and will break one way or the other. The two patterns are taught together because they are the same observation with two uses: the harami as a tentative reversal clue at a level, and the inside bar as a breakout structure whose mother bar supplies both the entry trigger and the stop. Both are weak on their own and useful in context.
Harami and inside bar, defined
A harami is two candles: a first candle with a large body, and a second candle whose body is contained entirely within the first body. The second candle is usually the opposite colour but does not have to be. A bullish harami is a large bearish candle followed by a small candle inside it, after a decline. A bearish harami is a large bullish candle followed by a small candle inside it, after an advance. An inside bar is defined by range: a candle whose high is below the previous high and whose low is above the previous low. The previous candle is called the mother bar. Every harami whose second candle also has its wicks inside the first range is an inside bar; an inside bar whose second body is not inside the first body is not a harami. In practice the inside bar definition is the one you can apply mechanically on gold, and the harami body rule is the one that tells you how sharp the loss of momentum was. Use both: check the range for the inside bar, then check the body to grade it.
The bullish harami after a decline
A bullish harami forms when a decline produces a large bearish candle, often into a level, and the next candle opens inside that body and goes nowhere. Sellers who had just won a wide period could not add to it. The second candle is frequently a small bullish body or a doji, which is the harami cross described below. What the pattern records is that the selling pressure that drove the first candle has been met, not yet overcome. That is a weaker statement than a hammer, where buyers actively rejected the low, and much weaker than a bullish engulfing, where buyers reversed the whole prior period. The bullish harami is therefore a watching pattern rather than an entry pattern. It becomes a long idea when a following candle closes above the mother bar high, or at least above the mother bar midpoint with a level underneath. On gold the harami is common at the end of a London sell-off, where the last wide red candle into support is followed by a quiet candle as the New York session waits to decide.
The bearish harami after an advance
The bearish harami is the mirror: an advance produces a large bullish candle into resistance, and the next candle opens inside that body and stalls. Buyers who had just won a wide period could not extend it. On gold this often shows at a previous day high or a round number after a strong morning, where the wide green candle is followed by a small body or a doji as the market waits for the afternoon. The reading is a loss of upward momentum at a level, not a reversal. It becomes a short idea when a following candle closes below the mother bar low, or below the mother bar midpoint with resistance overhead. The bearish harami has one more use, as an exit warning: if you are long into a level and a harami prints, it is a reasonable moment to take partial profit or tighten a stop, because the market has just told you that the push is pausing where supply is expected. You do not need to short it to act on it.
The harami cross
When the second candle is a doji rather than a small body, the pattern is a harami cross. The doji makes the loss of momentum more complete: the second period did not merely move less, it finished exactly where it started. A harami cross after an extended move at a level is a slightly stronger pause signal than a plain harami, for the same reason a doji is a stronger pause than a spinning top. It is still not an entry. The doji family rules from Module 4 apply: look at where the doji body sits inside the mother bar, whether its wicks tested the mother bar edges, and above all wait for the next candle to close beyond the mother bar in the direction of the trade. A harami cross that is followed by a candle closing back inside the mother bar in the direction of the original move has simply been a pause in a trend, and the trend has resumed. On gold, harami crosses around the New York open are often resolved within the next two H1 candles, which makes them a good training pattern for the confirmation habit.
The inside bar as compression
Step away from reversal for a moment and read the inside bar as the price action trader does: as compression. The mother bar set a range; the inside bar failed to leave it. If a second and third inside bar follow, the market has gone from a wide period to progressively narrower ones, and that compression is energy stored for a breakout. The direction of the breakout is not known from the compression itself, which is why the inside bar is traded as a two-sided trigger: a close above the mother bar high is a long, a close below the mother bar low is a short, and the opposite side of the mother bar is the stop. On gold the most useful inside bars form on H1 and H4 after a wide session candle, as the next session pauses before continuing or reversing. The best ones sit at a level and in a trend, because then one side of the breakout has structure behind it and the other side has a reason to fail. Inside bars inside a quiet range are just small candles among small candles; the mother bar must be a genuinely wide candle for the compression to mean anything.
What a small candle inside a big one records
In the language of Module 2 the mother bar is a period with a clear winner and a wide range. The inside candle is a period in which neither side could even reach the edges of the previous period, let alone extend them. That is a sudden drop in both energy and conviction. It happens for two different reasons, and the context tells you which. After a move into a level, it usually means the winning side has met the other side and the contest has gone quiet while both wait; that is the reversal reading, and the pattern becomes a harami. Inside a trend, away from levels, it usually means the winning side is resting after a wide push and the other side has not shown up; that is the continuation reading, and the pattern becomes an inside bar breakout in the trend direction. Both readings share the same resolution logic: the market will leave the mother bar range, and the side it leaves on is the side that was really in control. That is why the entry is always on the break, never on the inside candle itself.
Entry, stop and target rules
For both harami and inside bar the entry is a close beyond the mother bar in the direction of the trade. For a bullish harami or an inside bar long, that is a close above the mother bar high; some traders accept a close above the mother bar midpoint when a strong level sits underneath, which gets in earlier at the cost of more false starts. The stop goes beyond the opposite end of the mother bar, below its low for a long or above its high for a short, because a trade through that level means the compression resolved the other way. When the mother bar is very wide, that stop is far away; the alternative is to stop beyond the inside candle itself, which is tighter but gets hit by noise more often. Choose by the size of the mother bar relative to the average true range: a mother bar under two ATR takes the full stop, a larger one takes the inside candle stop. Targets come from structure as always, the nearest swing or session extreme beyond the breakout. A good practice on gold is to let the first target be the measured height of the mother bar projected from the breakout, then trail from there.
FAQ
What is a harami pattern?
A large candle followed by a small candle whose body is contained within the first body. After a decline a bullish harami records that selling momentum has stalled; after an advance a bearish harami records that buying has stalled. It is a pause, not a reversal, and needs a close beyond the mother bar before it is a trade.
What is the difference between a harami and an inside bar?
The harami is defined by bodies: the second body sits inside the first body. The inside bar is defined by range: the second high and low sit inside the previous high and low. They overlap heavily. The inside bar rule is the one you can apply mechanically; the body rule tells you how complete the loss of momentum was.
What is a harami cross?
A harami whose second candle is a doji. The doji makes the stall more complete, since the second period finished exactly where it started, so it is a slightly stronger pause signal. It is still not an entry; the resolution comes when a following candle closes beyond the mother bar.
How do I trade an inside bar on gold?
As a two-sided breakout. A close above the mother bar high is a long and a close below the mother bar low is a short, with the stop at the opposite end of the mother bar, or beyond the inside candle when the mother bar is very wide. Prefer inside bars that form at a level or inside a trend, after a genuinely wide mother bar.
Is a harami a strong reversal signal?
No. It is among the weaker patterns in the course, because it records only that momentum paused, not that the other side took control. Its value is as a warning at a level, as a reason to protect profit, and as the setup for a breakout trade whose entry and stop the mother bar defines.