Last Updated on 13 January, 2021 by Samuelsson
Among the various candlestick patterns used in technical analysis, those that involve three or more candlesticks are usually held in high regard by traders, and the bullish Hikkake pattern is one of them. The bullish Hikkake is used to recognize short-term upward movements of the price, which can be both a continuation of the trend or a reversal.
The bullish Hikkake candlestick pattern does occur quite frequently on candlestick charts, and traders consider it a reliable trend reversal indicator and use it to time their trades. So, here, we will discuss the main things you need to know about the bullish Hikkake pattern
These are the things you can learn from this post:
- What the bullish Hikkake pattern is
- How to identify the pattern
- How to interpret it
- The psychology behind the pattern
- How to trade it
- The limitations of the pattern
- Comparing bullish Hikkake with a false breakout
What is the bullish Hikkake pattern?
The Hikkake pattern derives its name from a Japanese word that means “hook, catch, ensnare.” The Hikkake pattern was first described in the Western world by Daniel L. Chesler, CMT, when he was trying to describe a pattern that seemed to trap traders in one direction while turning to move in the other direction. The Hikkake pattern is a multi-candlestick pattern, with at least three candlesticks but can be up to seven. Most commonly, it consists of four or five candlesticks. There are two types of the Hikkake pattern — the bullish Hikkake and the bearish Hikkake — but in this post, we are focused on the bullish Hikkake pattern.
The bullish Hikkake pattern consists of the harami pattern (inside bar), a fake move to the downside, and a reversal move with a breakout above the harami pattern’s high. It is like a three inside down candlestick pattern but without the constraints — it doesn’t require a specific type of trend, and the candle color doesn’t matter. While the bullish Hikkake pattern gives a bullish signal, whether the signal indicates a price reversal or continuation of an existing trend depends on where the pattern forms. A Hikkake pattern in a downswing can indicate a bullish reversal, while a Hikkake pattern in an upswing indicates a continuation of the uptrend.
In terms of market activity, the bullish Hikkake pattern is made up of a short-term decrease in market volatility, followed by a breakout move in the downward direction. This breakout move, most likely by the third candlestick in the pattern, tends to entice traders into thinking a breakdown is in play. They enter the market and set their stop loss above the upper end of the pattern. The price then reverses and moves upward, breaking above the upper end and triggering traders’ stop loss orders, which further enhances the upward movement. No wonder the Hikkake pattern is often referred to as a “fakey pattern” or an “inside day false breakout”.
The Hikkake pattern is used by traders and technical analysts for determining market continuations and turning-points. It is a simple pattern that can be seen in market price data, using point and figure charts, traditional bar charts, or Japanese candlestick charts. It is not a traditional candlestick chart patterns.
The anatomy of the bullish Hikkake trading pattern: how to identify the pattern
The Hikkake pattern is a complex bar or candlestick pattern that starts to move in one direction but quickly reverses and establishes a new move in the opposite direction. It is formed over several trading sessions, so it is a multi-bar/candlestick pattern. The pattern usually consists of three to seven price bars, but most commonly, four or five. The important features of the pattern are as follows:
- The pattern can be seen in any price trend and swing — downswing or upswing.
- The first price bar, often called the mother bar, is long and can be of any color.
- The second price bar, often called the inside bar, is smaller than the first one and its range lies within the first bar’s range.
- These first two price bars form what is known as the inside bar pattern or harami candlestick pattern — it doesn’t matter if this day closes lower or higher than it opened, so long as the body of the first candle completely overshadows the body of the second.
- The third price bar extends downward, below the low in the first setup (the inside bar pattern). This price bar can close bearishly or bullishly, and in rare cases, it can climb higher to close above the high of the second price bar, thereby completing the bullish Hikkake pattern.
- The next price bars depend on how the third price bar closed. They are mostly bullish bars moving upward to break above the high of the second bar.
- The last price bar in the pattern is the one that closes above the second bar’s high.
After completing the pattern, the price is likely to continue moving upward. In essence, the bullish Hikkake pattern is consists of an inside bar pattern, a downward fake-out, and a bullish reversal move that breaks above the inside bar pattern. The direction of the preceding price move does not matter.
Interpreting the bullish Hikkake pattern
The bullish Hikkake pattern gives you a bullish signal, irrespective of the price trend where it occurs. However, the nature of the price trend where it is formed determines whether it gives a bullish reversal signal or a bullish continuation signal. When the pattern occurs against a support level at the end of a downward price swing, the bullish Hikkake pattern indicates a possible price reversal to the upside, but if the pattern forms in an upward price swing, the indication is that the price is likely to continue rising.
As the name implies — “catch, hook, or ensnare” — the Hikkake pattern tries to trap traders with a downward fakey. In fact, when the pattern was first described, the founder was looking to describe a pattern he had noticed that seemed to trap traders investing in the market only to see it move away from what they expected. In the case of the bullish pattern, short-sellers and inexperienced buyers are faked out with the downward breakout of the inside bar pattern within the Hikkake. With the false breakout, some buyers rush to dump their positions while short-sellers quickly entered their sell orders, thinking that the market will drop.
Then, the price reverses and starts climbing up. Before you know it, it takes out the high of the inside bar pattern, forcing the short sellers to cover their shorts. What you get is a genuine breakout in the upward direction, signaling that the intention of the market all along is to move higher and not lower.
Although not as common as the inside bar pattern, the Hikkake pattern offers a more reliable signal, and here is why: It has shown a price rejection in the opposite direction, so the chances of price moving in the new breakout direction are quite high.
The psychology behind the bullish Hikkake pattern
The psychology behind the bullish Hikkake pattern is that of accumulation or re-accumulation of long positions in readiness for a bullish price movement. The pattern occurs as a result of the activities of institutional traders in the market, and from the way the pattern develops, those traders are preparing to push the price up.
As you know, the bullish Hikkake pattern consists of an inside bar pattern, a downward fake out, and a bullish reversal move that breaks above the inside bar pattern. From a conceptual basis, the pattern shows a short-term decline in market volatility as indicated by the inside bar in the pattern. An inside bar is a price bar that is totally within the range of the preceding price bar. Inside bars are quite common, and traders try to trade the breakout. They are mostly seen as market consolidation, and they give a low-risk entry point for price action traders. Also, the contracted range of an inside bar allows for a tight stop-loss position.
Since inside bar breakouts appear attractive, traders rush to trade it when the downward breakout happens, without knowing that the breakout is a false one. As expected, these retail traders set their stop loss orders above the inside bar’s high. Then, the price reverses to the upside, rising above the high of the inside bar where these traders have their stop loss orders. Triggering the stop loss orders (which are actually buy-stop orders) pushes the price up the more, giving rise to the huge bullish momentum that normally follows this breakout.
In essence, the pattern reflects the actions of institutional traders when they’re accumulating long positions — they deliberately push the price lower to get more opposite orders (hunting stop losses and inviting more sellers) so that they can fill their buy orders. When they’ve accumulated enough positions, they push the price up as intended. What the retail traders don’t know is that in placing their sell orders when the downward breakdown occurred, they are providing adequate liquidity for the institutional traders to accumulate their long positions, while their stop loss orders will serve to build early momentum for the real breakout.
The key thing here is, if you are patient enough and focus on detecting false breakouts, you might find more reliable trading setups in the form of Hikkake patterns as they do not only offer a systematic approach to trading false inside bar breakouts but also are the footprints of institutional traders.
Trading with the bullish Hikkake pattern
The bullish Hikkake pattern provides a good trading signal when used the right way and in the right market. The best market to trade the bullish Hikkake pattern is an up-trending market: it can be at the end of a prolonged pullback or within an upswing. The pattern may also be useful in trading a trend reversal if it occurs against a strong support level. You will need some other trading tools that can help you identify the trend and important price levels.
Tools for trading the bullish Hikkake pattern
Some trading tools and indicators may be quite useful in trading this pattern, and these are some of them:
- Trend lines: You need trend lines to help you delineate the trend and study the direction and its other peculiar features. Moreover, a trend line can act as a rising support level or descending resistance level where a pullback can reverse from in the future. In the case of the bullish Hikkake pattern, when it forms around a rising trend line, it has a higher chance of success.
- Moving averages: One of the most useful technical indicators, moving averages can help show the direction of the trend. They also serve as dynamic support and resistance levels, depending on the type of trend. You can use this indicator to trade the bullish Hikkake pattern.
- Support level: A strong support level is necessary for trading any bullish reversal setup, and the bullish Hikkake pattern is no exception. You identify a strong support level by checking the number of times the price has reversed around it. Note that a resistance level can become a support level once the price climbs above it.
- MACD: Being a breakout strategy, the bullish Hikkake pattern can be combined with the MACD indicator. The indicator can tell you something about price momentum at the time of the real breakout. You need to see the indicator line above the signal line and may also be above the zero level.
How to trade the bullish Hikkake pattern
Now, let’s take a look at some of the scenarios where the bullish Hikkake pattern provides a tradable buy signal:
Bullish continuation signal
In a rising market, the bullish Hikkake pattern indicates that the market may continue to rise, so you may want to buy into that prediction. However, you need to be sure that the trend is still fresh and not an extended one that is likely to reverse at any time.
When trading this signal, place your buy order at the close of the breakout candlestick (the candlestick that breaks above the inside bar’s high to complete the pattern). Alternatively, place a buy-stop order a little above the inside bar’s high when the false downward breakdown reverses. Your stop loss should be below the lowest point of the pattern, while your profit target should be just before the next resistance level or a 2:1 reward/risk ratio.
Pullback reversal signal
Here, you want to trade the reversal of a prolonged pullback in an uptrend. The bullish Hikkake pattern should form around a support level, a trend line, a long-period moving average, or a Fibonacci retracement level.
Place your buy order at the close of the breakout candlestick or set a buy-stop order a little above the inside bar’s high when the false downward breakdown reverses. Put your stop loss below the lowest point of the pattern and set your take profit just before the next resistance level.
Attempting to catch a full trend reversal is quite risky, even with the bullish Hikkake pattern, but if you must try it, let it be around a very strong support level. You trade it as you would trade a bullish Hikkake pattern.
The limitations of the bullish Hikkake pattern
The bullish Hikkake pattern provides a good trading signal when traded in the right market condition with the right tools, but as with other candlestick patterns, it has some limitations. One of them is that it is not to be traded alone: while the entry point and stop loss are clearly defined with the pattern, implementing profit-taking measures is up to you, as the pattern doesn’t provide a profit target.
Another thing is that it should not be assumed that the price will break out in the expected direction. The pattern can still fail, which is why you must have a stop loss order.
Bullish Hikkake pattern vs. false breakdown
A false breakdown is when the price breaks below a known support level and quickly reverses and starts rising, leaving early sellers trapped. The bullish Hikkake has an element of a false breakdown in that the price moves downward following the inside bar and breaks below its low before moving upward to break above the high.
In fact, in a much lower timeframe, the insider bar breakdown would appear exactly like a normal false breakdown.
However, the bullish Hikkake pattern is more than just a false breakdown; it also has a real breakout to the upside. A bullish Hikkake pattern is a mixture of price consolidation, false breakdown, and real breakout.
Final words: How to learn swing trading
The bullish Hikkake pattern is a top-quality price action setup. It shows the activities of institutional traders and can be an effective signal for swing trading. But you have to first learn how to trade the right way.
While you can teach yourself how to trade by studying the trading resources you can find online, you may end up not learning the right thing. The easier way to learn swing trading is to enroll in a swing trading course. But if you simply want to make money from trading stocks without bothering about analysis, you can subscribe to a reliable swing trading signal service that would tell you which stocks to buy and when to open and close your trades.