In discussions on candlesticks the other day I mentioned the hikkake pattern.
Hikkake came to mind as a candlestick pattern which doesn’t use only a single day’s OHLC data, and which doesn’t rely on overnight gaps but which does get a seal of approval from Thomas Bulkowski, a leading candlestick “scholar”.
I’ll set out what it is why it might more useful in forex than most candlestick studies.
Overnight gaps are not common in forex and are not the same as in markets with a closed session. Its notable that the best continuation and reversal candlestick patterns listed by Bulkowski are either incredibly rare or rely on overnight gaps for identification purposes. It follows that pure candlestick pattern trades in forex are therefore limited to either single day patterns like hammers and shooting stars, which have a low win rate or the less efficient multi-candlestick patterns which do not rely on gaps. You might find the hikkake bridges over this problem.
To sum up, it comprises a “mother” bar followed by an inside bar. The mother bar can be bullish or bearish but the inside bar represents indecision between buyers and sellers. The initial move away from the inside bar is seen as a frequently false move, and entry is made in the opposite direction when price retraces and breaks out past the opposite extreme of the inside day’s range. So if price initially drops through the inside bar’s low, place a buy order at or just above the inside bar’s high. A stop can then be associated with the order at e.g. the inside bar’s low or the mother bar’s low.
I’ll post up some current examples from the dailies.
This was a valid recent hikkake, on which buy orders should now have triggered.
Mother bar 08/11
Inside bar 09/11
Initial price break-out - 12/11, downwards through low of inside bar
Buy order set 12/11 at high of inside bar
True break-out - upwards, 13/11 (though price initially fell during the overnight, this doesn’t invalidate the set-up)
This is a with-trend entry so many traders will see no need for a TP.
Note that a very tight stop at the low of the inside bar or mother bar would have been hit on the 14th. Hikkake patterns can have very tight stops, which is either good or bad depending on your risk tolerance. There’s a good argument for a wider stop when you’re looking to get into a with-trend position.
This was a recent potential hikkake which has so far failed to trigger.
Mother bar 12/11
Inside bar 13/11
Initial price break-out - 14/11, upwards through high of inside bar
Sell order set 14/11 at high of inside bar
True break-out downwards has not yet occurred. The true breakout should print within 3 days of the inside bar, and today is Day 3. Price could still drop hard through the sell order price level but its unlikely. More probably the sell order will have to be cancelled as we go into the overnight.
Not surprisingly, EUR/USD looks likely to have a similar outcome.
Granted that the best candlestick patterns are denied us in forex, because they rely on gaps, so we are left with the “second division” patterns.
Bulkowski rates his patterns according to not just whether the pattern outcome direction was correctly identified but on distance of travel, so he shows a bias towards distances of travel which are better than about 5%, but this reflects the markets he used in his statistical samples. Actually, in forex, a 5% move is not something we often see in an entire month and if a pattern gave me a 5% winner I’d be happy.
The hikkake isn’t really a pattern with price target, it is more of a turning-point signal. In that way it doesn’t have a textbook “price target”. I am sure a Fibonacci extension price target could be applied, as they are with 1-2-3 reversals, that way you have a clearly defined way to trade the pattern. That will also make your price targets relative to the volatility of the underlying, so it won’t matter if you are trading stocks or currency, they will be have a clear target that are equal based on the underlying’s volatility.
I never use TP’s these days, just exit on the TA. I’ve said so many times I just don’t rank entry signals as very important in trading but they mean something to some people so we are where we are.
Hikkake can be a reversal signal or a continuation signal - I guess it depends on your perspective, but I acknowledge the importance of volatility, I’m using ATR-based stops rather than the highs/lows I used to use.
Of course there are better patterns but that’s true of ALL patterns since there isn’t a “best” pattern. Some people prefer bars to candlesticks as a foundation, some don’t get on with Fibonacci or MACD, there have to be multiple routes to profits to suit a multiplicity of styles. What I’m hoping to show is that hard-won candlestick knowledge can be used in forex but with a proviso that patterns which work in stocks can’t just be pulled across and used here unedited, and this is something that ranks pretty well if that’s all you want to use.
Thursday was an eventful day in UK/EU politics so many pairs printed an unusually wide daily range on their chart. As yesterday was a Friday and not so eventful, not surprisingly many charts have now printed an inside day for 16/11, meaning there might be plenty of hikkake patterns forming on Monday for possible entries Tuesday or Wednesday.
Be cautious if multiple EUR and/or GBP pairs make a buy signal or a sell signal: I’m not recommending taking multiple parallel positions on the same base currency.
Also, for those who are interested, there are “live” hikkake set-ups now in Brent (a sell signal if price drops through the low of 15/11 on Monday or Tuesday) and Gold (ditto). The Brent short would be with a strong downtrend.
EUR/JPY hikkake short triggered yesterday. This is with the downtrend, which is not that strong on this chart but the EUR looks bearish across other pairs except CAD and GBP, though that’s hopefully explained by their respective oil price and Brexit situations. Still, I don’t really expect to be able to hold onto this for very long.
Noted there is a little clutch of inside days printed which might be based on Thanksgiving. With US market firms being out of the game yesterday, there is a personal choice as to how much weight you would attach to inside days this week - TA patterns on low volumes can be misleading, e.g.
Dow 21/11
Brent 21/11
DAX 22/11
Gold 22/11
Silver 22/11
plus quite a number on the forex markets.