What it means
The pattern starts with an inside bar. This is a trading period in which the high is lower than the previous period's high and the low is higher than the previous low, so the price range sits entirely inside the previous one.
It shows hesitation, with neither buyers nor sellers in control. The next move is a break out of that range, either above the high or below the low.
In a hikkake, this breakout fails: within a few periods the price returns to the inside bar's range and moves the other way. Traders who acted on the first move are trapped, and their need to exit adds fuel to the reversal.
The name comes from a Japanese word associated with snaring or catching, and the pattern was described by trader Daniel Chesler. A standard version signals a buy when a downward false break is followed by a close back above the inside bar's high, and a sell when an upward false break is followed by a close below the low.
Variations add extra bars or filters. Traders place a stop-loss order beyond the false extreme, since a move past that point shows that the pattern has failed.
The target can be a multiple of the risk, or a nearby level of support or resistance. The idea is to take a small, defined risk for a larger potential gain.
Like most chart patterns, the hikkake works better in some markets and periods than others. It generates many signals, and a good share of them fail, especially in choppy conditions.
Testing on historical data, with realistic trading costs, is advisable before trading real money. Position size is the other safeguard.
Because the stop-loss is close to the entry, a trader can size the trade so that a failure costs a fixed small share of the account, often 1% or less. Following that rule means that a string of failed signals will not do serious harm.
In practice
Real-world examples.
Example
A currency trader sees a narrow-range day in a major pair, followed by a dip below the low that quickly reverses. She buys when the price closes above the inside bar's high and sets a stop below the dip.
Example
A swing trader in shares notices a hikkake after a strong rise. The price pushed above the inside bar, failed and fell back, so he sells short with a stop above the false high.
Example
A commodity analyst back-tests the pattern on 10 years of daily oil prices. After accounting for costs, the results are only slightly better than chance, and she recommends using the pattern only with other confirming signals. Her report notes that results varied widely between years, with two of the ten years producing most of the profit.
Formula
Calculation
Reward-to-risk ratio = (target price - entry price) / (entry price - stop price)
Suppose a share forms an inside bar between $98.50 and $101.00, breaks down to $98.00, then closes back above $101.00. A trader buys at $101.50 with a stop-loss at $97.50, just below the false low, and a target of $109.50.
Risk per share = 101.50 - 97.50 = $4.00.
Reward per share = 109.50 - 101.50 = $8.00.
Reward-to-risk ratio = 8.00 / 4.00 = 2.
If the trader buys 500 shares, the maximum planned loss is 500 x 4.00 = $2,000 and the target gain is 500 x 8.00 = $4,000. With a ratio of 2, the trader breaks even if just over one third of such trades work, ignoring costs.Case study
Seen in the real world.
Stonemill Capital is a fictional trading desk that tested the hikkake pattern on 12 liquid futures markets. Out of 480 signals over three years, 54% were profitable, with winners averaging $900 and losers averaging $600.
On those illustrative figures, the expected profit per trade was 0.54 x 900 - 0.46 x 600 = $210, before costs of $80 per trade. The desk decided that the edge was real but thin, so it traded the pattern with small position sizes and only when the broader trend agreed with the signal.
Watch out
Common mistakes.
- Treating every breakout from an inside bar as a trap, when many are genuine moves.
- Ignoring stops, since a failed hikkake can turn into a large loss if the price keeps running.
- Trading the pattern without testing it, when its results vary by market and period.
Questions
People also ask.
What is an inside bar?
It is a trading period whose high and low both lie within the previous period's range.
Who developed the pattern?
Trader Daniel Chesler is credited with describing the hikkake pattern.
Does it work on all time frames?
It can be applied to charts of any length, but shorter time frames tend to produce more false signals.
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