What Is the Hikkake Pattern?
The Hikkake pattern is a notable price pattern that traders and technical analysts utilize to foresee short-term market moves. Its dual configurations indicate either a briefly downward or upward market trend.
Key Aspects of the Hikkake Pattern
- The Hikkake pattern serves as a predictive tool for short-term market movements.
- It manifests in two setups, one suggesting a downward trend and the other pointing upward.
- The pattern capitalizes on the collective reversal in traders’ expectations, prompting market direction shifts.
Understanding the Hikkake Pattern
Pronounced ‘Hĭ KAH kay’, the Hikkake pattern is an intricate candle or bar sequence that initially trends in one direction before promptly reversing. This pattern, conceptualized by Daniel L. Chesler, CMT, was first documented in 2003. It comprises four essential points:
- The initial two candles (or bars) decrease in size, forming an ‘inside-day’ or ‘harami’ pattern, where the second candle’s body is overshadowed by the first.
- In the bullish setup, the third candle closes above the high of the second candle; in the bearish setup, it closes below the low of the second candle.
- Subsequent candles may drift above (or below) the third candle, hinting a potential reversal.
- The final candle closes above the second candle’s high in a bullish setup (or below the low in a bearish setup), confirming the pattern.
Upon achieving the fourth point, the pattern suggests a continuation following the final candle’s direction. Below are illustrations of both a bullish and bearish setup:
Hikkake Pattern Origins
The term ‘Hikkake’ derives from a Japanese word meaning ‘hook, catch, ensnare.’ Chesler coined this term to describe a pattern where traders are ostensibly ’trapped,’ leading to unanticipated market movement as they reverse positions.
Conceptually, the Hikkake pattern starts with a short-lived dip in market volatility followed by a price breakout. The third candle attracts traders, prompting them to set stops contrary to their positions. If the pattern reverses, these stop-loss orders get activated, thereby escalating the price action beyond the second candle’s limits.
Example of a Hikkake Pattern in Action
This chart features a typical Hikkake pattern in Microsoft’s (MSFT) price actions, highlighting the bullish setup conforming to the four key points. The rectangle marks the forecast region, anticipating a bullish movement beyond it. In this instance, an upward trend develops, albeit moderately, post-pattern formation, serving as a practical example of the Hikkake pattern’s effectiveness. Note that not all Hikkake patterns guarantee the predicted market direction.
Related Terms: inside-day pattern, harami, candlestick pattern, stop-loss orders.
