Hikkake Trading

8/12/2019 Hikkake Trading

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BY DAN CHESLER, CMT, CTA

T he stutter step is a com-mon tactic used by athletesto bait and evade a pursu-ing opponent. The hikkakepattern represents a type of stutter stepfound in the market a false breakout.

Hikkake is a Japanese verb that meansto trap, trick or ensnare, which isalso the effect of false moves on unsus-pecting traders. In Western terminology,the correct name for this pattern would

be an inside day false breakout.

The basic hikkake pattern consists oftwo price bars two hourly bars, twodaily bars, two weekly bars, etc. The firstbar in the pattern is an inside bar, whichis simply a bar with a lower high andhigher low than the preceding bar. The

second bar in the pattern must have ahigher high and higher low than the pre-vious (inside) bar for a bearish hikkakeset up, or a lower low and a lower highthan the previous (inside) bar for a bull-ish hikkake set up.

The essence of the pattern concept iscaptured in these two bars. The markethas just broken out from an inside bar.Traders are positioned to go with themarket in the direction of the breakout.However, just as an athlete will execute

a well-timed stutter step to throw off anopponent, so does the market. The mar-

kets true intent becomes clear only afterit begins moving in a direction oppositethat of the initial breakout.

As with all patterns, it is important towait for signs of verification before act-ing. With the hikkake pattern, a falsemove should not be anticipated unlessprice crosses above the high of the inside

bar (for a bullish setup) or below the lowof the inside bar (for a bearish setup).Verification must occur within three barsof the hikkake pattern, otherwise the

pattern is ignored. Upon entering a posi-tion, one way traders can define their

risk is by using the highest high (forshorts) or lowest low (for longs) withinthe pattern as a stop-out point.

Note that the basic hikkake patternignores the open-to-close relationship,also known in candlestick terminologyas the real body portion of the price

bar. This is not atypical. For example, anumber of traditional candlestick pat-terns, such as tweezers, hanging-manlines and hammers, also ignore theopen-to-close relationship.

42 www.activetradermag.com April 2004 ACTIVE TRADER

TRADING Strategies

T-Bonds (USZ03), daily

A

B

C D

September October November December

112.00

111.16

111.00

110.16

110.00

109.16

109.00

108.16

108.00

107.16

107.00

106.16

106.00

105.16

105.00

104.16

104.00

Hikkake patterns function both as continuation patterns (A and B) and reversalpatterns (C and D).

FIGURE 1 REVERSAL AND CONTINUATION

Source: FutureSource

TRADING FALSE MOVESwith the hikkake patternWhether you call it a hikkake pattern or an inside day false breakout,

this simple chart formation reflects basic price principles.


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Lets examine some examples of this pat-tern. Admittedly, the following exam-ples have been pre-selected; as a result,they do not illustrate the patterns suc-cess and failure rates.

In Figure 1 (opposite page), thehikkake pattern reversed short-termprice action (points A and B) in an exist-ing uptrend. The chart also demon-strates how the hikkake pattern can sig-nal trend reversals (points C and D).Verification occurred within three barsfollowing the setups at A and C, withintwo bars at D and within one bar at B.

In Figure 2 (right top), a well-definedhikkake pattern forms in the context of ad o w n t rend in cotton; verificationoccurred after price traded below thelow of the inside bar (dashed line). InF i g u re 3 (right bottom), compacthikkake patterns with clearly definedentry and risk points led to significantprice moves in natural gas. This chartdemonstrates a continuation typehikkake (point A) as well as a trend-reversal hikkake (points B and C). InFigure 4 (p. 44), points A and B markexamples of successful hikkake setups

reversing intermediate-term trends.In Figure 5 (p. 44), verification did not

occur at points A or B, hence no signalswere generated. Verification did occur atpoint C, leading to a continuation of theuptrend.

Figure 6 (p. 45) shows two hits andtwo misses. Successful patterns formedat points A and C. Verification occurredat B, but a trade would have resulted ina loss. Verification did not occur follow-ing the potentially bearish hikkake pat-tern at point D, and no trade signal wasgenerated.

At point A in Figure 7 (p. 45), a bear-ish hikkake pattern occurred but lackedverification. Another bearish hikkakepattern formed at point B, this time withverification. Small bearish hikkake pat-terns led to a continuation of the down-trend at points C and D.

In Figure 8 (p. 46), hikkake patterns atB and D lacked verification and did nottrigger reversals. Hikkake pattern E wasverified, but would have resulted in a

ACTIVE TRADER April 2004 www.activetradermag.com 43

continued on p. 44

Natural Gas (NGF04), daily

A

BC

November December

6.50

6.40

6.30

6.20

6.10

6.00

5.90

5.80

5.70

5.60

5.50

5.40

5.30

5.20

5.10

5.00

4.90

This example features compact hikkake patterns that provide clearly definedentry and risk points.

FIGURE 3 COMPACT HIKKAKES


Cotton (CTH04), daily

A

November December

85.00

84.00

83.00

82.00

81.00

80.00

79.00

78.00

77.00

76.00

75.0074.00

73.00

72.00

71.00

70.00

69.00

68.00

In the case of a bearish hikkake pattern, verification occurs after price tradesbelow the low of the inside bar (dashed line).

FIGURE 2 VERIFICATION



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losing trade. Successful hikkake rever-sals occurred at A, C and, most notably,point F.

Given its simplicity, traders and ana-lysts may want to experiment with the

basic hikkake theme. One variation ofthe basic pattern applies the followingset of requirements to the bar immedi-ately preceding the inside bar:

1. The bar must close at the top of itsrange (for bearish patterns) or thelow of its range (for bullishpatterns).

2. The range must be less than the

range of the previous bar.

This version occurs far less frequentlyin the data than the basic hikkake pat-tern. In addition, the modified hikkake isprimarily a trend reversal pattern, where-as the basic hikkake functions as both areversal and a continuation pattern.

The hikkake pattern fits into the gener-al false move category. RichardSchabacker gave perhaps the bestexplanation of the mechanics behind

false moves when he wrote in his bookStock Market Theory and Practice:

Having completed its accumula-tion and brought the stock range tothe apex of its coil or triangle, thepool will figure, quite corre ctly,that many traders have sensedtheir accumulation, expect thestock to go up, have brought it, buthave it protected by stop-lossorders, or even reverse stop orders.The pool, there fore, engineers aquick false move, or shake-out,

sending the price of the stocksharply down perhaps two or threepoints, catching the close stop-lossorders and thus buying for thepools further account the stockthus automatically thrown to themarket.

E s s e n t i a l l y, Schabacker gives thecredit for shakeouts and false moves tomanipulation by large pool operators todays equivalent of institutions.

44 www.activetradermag.com April 2004 ACTIVE TRADER

Lean Hogs (LHG04), daily

A

B

October November December

62.50

62.00

61.50

61.00

60.50

60.00

59.50

59.00

58.50

58.00

57.50

57.00

56.50

56.00

55.50

55.00

54.50

54.00

53.50

53.00

The two hikkake patterns (points A and B) successfully reverse interme -

diate-term trends.

FIGURE 4 INTERMEDIATE TREND REVERSAL


Altria Group (MO), daily

A

B

C

October November

49.50

49.00

48.50

48.00

47.50

47.00

46.50

46.00

45.50

45.00

44.50

44.00

43.50

Price action did not verify patterns A or B, so no signals occurred. The pat -tern at point C was verified, and led to a continuation of the uptrend.

FIGURE 5 NO VERIFICATION, NO SIGNAL



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This idea does have merit. Because ofthe size of their orders, institutions andlarge commercial traders often enter and

exit positions over time, rather than allat once. In the process they oftenattempt to manage the tape to facili-tate their end goals. This is as true todayas it was 100 years ago.

But dont underestimate the role ofsmall traders. There is evidence thatsuggests small traders find selling prices t rength and buying price weaknessanti-intuitive, preferring instead to gowith the prevailing price direction. It isnot hard to imagine how this group oftraders could become trapped at the topor bottom of a move once less-informed

demand or supply is exhausted. Theunwinding of these losing positionscould be the fuel behind hikkake patternsignals.

For traders, the main benefit of price pat-terns might be the establishment ofparameters such as entry price and risk,rather than outright price prediction.Peter Brandt, an avid classical chart trad-er and one of the most successful tradersin Commodity Corporations history(now Goldman Sachs Princeton LLC),

summed up the usefulness of patternsthis way in his book Trading Commodity

ACTIVE TRADER April 2004 www.activetradermag.com 45

continued on p. 46

References:Stock Market Theory and Practice

by Richard W. Schabacker,

B. C. Forbes Publishing Co., 1930.

Trading Commodity Futures

with Classical Chart Patterns

by Peter Lewis Brandt,

Advanced Trading Seminars, 1990.

How Charts Can Help Youin the Stock Market

by William L. Jiler, Trendline,

Division of Standard & Poors

Corporation, 1962.

Index Funds and

Stock Market Growth

by William N. Goetzmann

and Massimo Massa,

Journal of Business,

Vol. 76, no. 1, (2003):1-28.

KLA-Tencor (KLAC), daily

A

BC

D

October November December

61.00

60.00

59.00

58.00

57.00

56.00

55.00

54.00

53.00

52.00

Successful patterns occurred at points A and C. The pattern at point B was

verified, but a trade would have resulted in a loss. The bearish hikkake pat -

tern at point D was not verified.

FIGURE 6 TWO HITS, TWO MISSES


General Electric (GE), daily

A

B

C

D

September October

32.00

31.50

31.00

30.50

30.00

29.50

29.00

28.50

A bearish hikkake pattern occurred at point A but lacked verification; a second

bearish hikkake formed at point B, this time with verification. Small bearishhikkake patterns led to continuations of the downtrend at points C and D.

FIGURE 7 CONTINUATION PATTERNS



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Hikkake Trading