The Hikkake Pattern
By Daniel Chesler, CMT
Posted: Apr 13, 2012
When market activity declines and trader conviction wanes, the outcome is visible on price charts in the form of a trading range. Trading ranges often take on a definable shape. For example, traditional "head-and-shoulders", "triangles", and other well known technical patterns normally occur during the transitions between trending price action.
In classical charting parlance, a "breakout" refers to a sudden move away, or escape from, the boundaries of a trading range. Some traders use the term "breakdown" to refer to the bearish variety of a breakout move. The meaning of both words is the same, however: A sharp price move that marks the beginning of a trend and the end of a trading range.
Most technical strategies attempt to jump aboard and hitch a ride in the same direction as the initial breakout. As any experienced trader knows, however, breakouts often fail to give reliable signals. In this article, we will look at a method for taking advantage of failed breakouts that emanate from one very specific type of trading range.
Despite its Japanese name, the hikkake pattern is not a traditional candlestick pattern. Any type of price chart, from bar chart to point-and-figure chart, can be used for observing the pattern. Hikkake is a Japanese verb that means to trick or to ensnare.
When traders have committed capital to a market, and the market then moves in the opposite direction from what is expected, we might say the market has "tricked" us. Although some have referred to the hikkake pattern as an "inside day false breakout" or a "fakey pattern", these are deviations from the original name and are not popularly used to describe the pattern.
For example, the name "hikkake pattern" has been chosen by the majority of book authors who have covered the subject, including Technical Analysis: The Complete Resource for Financial Market Technicians by Charles D. Kirkpatrick and Julie R. Dahlquist, Long/Short Market Dynamics: Trading Strategies for Today's Markets by Clive M. Corcoran, and Diary of a Professional Commodity Trader by Peter L. Brandt.
The first step to identifying the hikkake pattern is to identify an "inside" bar. An inside bar is any price bar (hourly, daily, weekly, etc.) that is entirely within the range of the previous period.
For example, notice how, in Figure 1 below, the range of the most recent bar has both a lower-high and a higher-low versus the preceding bar.
Figure 1. An "Inside" Bar
Once you've identified an inside bar, the next bar determines whether the hikkake pattern is either a bullish or bearish pattern.
For a bullish hikkake pattern, the next bar must have both a lower-low and a lower-high, as shown in Figure 2.
Figure 2. Bullish Hikkake Pattern
For a bearish hikkake pattern, the next bar must have both a higher-low and a higher-high, as shown in Figure 3.
Figure 3. Bearish Hikkake Pattern
Once a bullish or bearish hikkake pattern has formed, an actual trade signal is not given unless and until the pattern has been confirmed. For bearish hikkake patterns, a confirmation, and, thus, a bearish trade signal, comes only after prices trade below the low of the first bar (i.e., the "inside bar").
Figure 4 is an example of a confirmed bearish hikkake pattern. The red dotted horizontal line marks the low of the "inside bar".
Figure 4. Confirmed Bearish Hikkake Pattern
Pattern confirmation works the same way for the bullish hikkake pattern, but in reverse. For bullish hikkake patterns, a confirmation, and, thus, a bullish trade signal, comes only after prices trade above the high of the first bar (i.e., the "inside bar").
Because there is no trade signal until the hikkake pattern has been confirmed, some hikkake patterns never give any signals. If there has been no confirmation within 3 - 4 bars after the pattern has formed, the pattern should be abandoned.
The following charts demonstrate hikkake pattern examples using charts of actual stocks and commodities.
Chart 1, a weekly chart of the United States Oil Fund ETF, shows how a short signal was given following a confirmed hikkake pattern. The trigger price was the low of the "inside" bar.
Chart 1. Weekly Chart of the United States Oil Fund ETF
Chart 2, a weekly chart of the SPDR S&P500 ETF, shows how a long signal was given following a confirmed hikkake pattern. The trigger price was the high of the "inside" bar.
Chart 2. Weekly Chart of the SPDR S&P500 ETF
Chart 3, a daily chart of GMX Resources, shows how a long signal was given following a confirmed hikkake pattern. The trigger price was the high of the "inside" bar.
Chart 3. Daily Chart of GMX Resources
Chart 4, a daily chart of the March 2012 Natural Gas futures, shows how a long signal was given following a confirmed hikkake pattern. The trigger price was the high of the "inside" bar.
Chart 4. Daily Chart of the March 2012 Natural Gas Futures
As with all technical patterns, traders are free to determine what constitutes reasonable amounts of risk, for the purpose of placing protective stops, as well as determining exit targets. In general, however, a bullish pattern failure would only be indicated by prices falling back below the lowest low of the entire hikkake pattern (including all intervening bars prior to confirmation).
In our example of Natural Gas in Chart 4, note how the market sold off on the very next bar following confirmation. Prices did not, however, trade below the low of the pattern. Conversely, a bearish pattern failure would be indicated by prices rising back above the highest high of the entire hikkake pattern (including all intervening bars prior to confirmation).
*Reprinted (and modified) with permission from Dan Chesler