What is the Hikkake pattern?
The hikkake pattern is a price pattern used by technical analysts and traders who hope to identify a short-term movement in the direction of the market. The pattern has two different setups, one that involves a short-term downward movement in price action and a second setup that involves a short-term uptrend in price.
- The hikkake pattern is a price pattern used by technical analysts and traders who hope to identify a short-term movement in the direction of the market.
- This pattern has two different setups, one that involves a short-term downward movement in price action and a second setup that involves a short-term uptrend in price.
- The hikkake pattern appears to work based on traders’ expectations that the price will move in one direction and then collectively rescue themselves as the price reverses.
Understanding the Hikkake pattern
The hikkake pattern (pronounced Hĭ KAH kay) is a complex bar or candle pattern that begins to move in one direction but quickly reverses and is said to set a forecast for a move in the opposite direction. This pattern was developed by Daniel L. Chesler, CMT, who first published a description of the pattern in 2003. The pattern has four key points:
- The first two candles (or bars) in the pattern are of decreasing size. These are known as an inside day pattern or a harami candlestick pattern. It does not matter if any of these days closes higher or lower than it opened, as long as the body of the first completely outshines the body of the second.
- The third candle closes below the low in the first setup (or above the high in the second setup) of the second candle.
- The next or more candles will move below (or above in the second setting) the third candle and may begin to reverse direction.
- The final candle will close above the high of the second candle (or below the low of the second candle in the second setup).
Once the fourth characteristic is achieved, the pattern implies a continuation in the direction of the final candle. The next two graphs show examples of both configurations.
The first pattern is for the bullish setup. Each of the four characteristics is marked to show where they have occurred in these examples. The second pattern, for the bearish setup, is seen less frequently.
The name of this pattern comes from a Japanese word that means “hook, catch, catch”. When Chesler first described the hikkake pattern, he was looking to describe a pattern that he had noticed seemed to ensnare traders committing capital in a market only to see it drift away from what they expected.
From a conceptual basis, the hikkake pattern is comprised of a short-term decline in market volatility, followed by a breakout movement in price action. This move (the third candle in the pattern, will tend to entice traders to think that a breakout has formed. Traders enter the market and set a stop in the opposite direction of their trade. If the price pattern reverses, then the operator stops). Loss orders are triggered and can give price a boost as it reverses beyond the limit of the second candle in the formation (where the stop orders are likely to be).
Example of a Hikkake pattern
This pattern occurred in Microsoft stock price action (MSFT) and is typical of how this pattern plays out a little more than half the time it occurs. The pattern shown on this chart is the bullish setup and has all four characteristics described above.
Here, the price pattern is highlighted with a rectangle, and the implicit forecast is for a bullish move in the days beyond the rectangle. This example shows that the chart had a slight uptrend after exiting the boxed area. Not all hikkake patterns develop in the correct direction of the forecast.