Candlestick patterns play a crucial role in technical analysis as they provide valuable insights into potential market reversals and continuations. One of the less common yet highly important patterns is the “Bearish Hikkake” candlestick pattern.

This article aims to delve into the significance, psychology, formation, and trading strategies associated with the Bearish Hikkake pattern.

Bearish Hikkake Candlestick Pattern – Definition

The Hikkake pattern introduced by Daniel L Chesler is a Japanese-named pattern which translates to ‘hook, trap’ in Japanese. This pattern is named because of its series of candlestick bars, which imply a deceptive setup and mislead traders into placing incorrect positions.

A bearish hikkake is a multi-candlestick pattern that generally indicates a short-term bearish trend. This means that after its formation, the stock price will likely see a downside movement for a period of time.

The candlestick pattern consists of five different candles. These candles in the pattern have two different setups, one being the short-term uptrend movement and a second setup implies a short-term downtrend where an entry to the short position can be spotted.

Bearish Hikkake Candlestick Pattern – Formation

Spotting the bearish hikkake candlestick pattern would be challenging. So a few things must be fulfilled before the candlestick pattern can be considered a bearish hikkake and they are as follows:

• The first two candles are an inside candlestick pattern or a harami pattern where the first candle completely overshadows the body of the second candle.
• The third candle has a higher high and higher low compared to the second candle.
• The fourth candle closes above the third candle.
• The final is a red candle that closes below the low of the previous candles.

Bearish Hikkake Candlestick Pattern – Psychology

The formation of this pattern shows a change in the market sentiment. As this pattern generally appears after a downtrend, the formation indicates a negative sentiment in that particular security. 

The first two candles of the pattern form a bullish harami pattern which indicates a short-term uptrend. As the next green candle after the harami pattern suggests the continuation of the buying pressure traders enter a long position based on the harami pattern formed.

For the long trade entered the stop loss will be the low of the harami pattern, but the final candle of the hikkake pattern will be a large red candle which closes above the low of the harami pattern hitting all buyer’s stop loss. Here, the buyer’s stop loss becomes the new sell level that creates selling pressure which strengthens the downtrend in the security.

Bearish Hikkake Candlestick Pattern – Trading Ideas

Traders must ensure the correct identification of the pattern to spot a better trade with a good risk-to-reward ratio. Once this pattern is formed, the following are the guidelines for taking a trade:

• ENTRY: When the last candle of the pattern closes below the low of the first candle, traders can take a short position below the closing price of the last candle.
• TARGET: Traders can exit the trade when the price of the security reaches the immediate support zone. Once this level is reached, one can also book partial profits in the trade and hold on to the remaining position until the next support level.
• STOP LOSS: Traders can place the stop loss near the high price of this pattern.

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Bearish Hikkake Candlestick Pattern – Example

In the above chart of Tata Motors, we can observe the formation of the bearish hikkake candlestick pattern. As discussed above, the price of the stock saw a bearish movement after the formation of this pattern.

Limitations

The formation of a pattern helps in identifying trading opportunities, but it’s also important to understand its limitations for better risk management.

• The effectiveness of the Bearish Hikkake pattern may vary depending on market conditions, it can be more reliable in trending markets than in range-bound markets.
• The pattern takes five consecutive sessions (or candles). As a result, the market may already account for all the price action.
• Relying solely on the Bullish Hikkake pattern for trading decisions can be risky. It is advisable to use additional technical indicators, such as volume analysis or moving averages, to confirm the pattern.

Conclusion

The bearish hikkake candlestick pattern can appear in any market and generally indicates a bull trend. However, it is better to take a trade only when the pattern forms completely. Traders should not rely solely on this pattern but also include other technical tools and indicators to confirm the price prediction. It is important to place a stop loss to minimise losses if the price of the stock moves against our analysis.

Written by Deepak

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