Trading Setup Tutorials : "Hikkake Trade Setup"

HIKKAKE TRADE SETUP

Dan Chesler discussed this candlestick trading setup in the Active Trader Magazine in April 2004 (“Trading False Moves with the Hikkake pattern”). Hikkake means trap, trick or ensnare. This trade setup seeks to profit from false breakouts.

RULES FOR LONG HIKKAKE

1.   An inside bar.

2.  The next bar has a lower high and lower low.

3.   Place buy order at the high of the original inside bar for the next three bars.

4.   Cancel order if not triggered after three bars.

RULES FOR SHORT HIKKAKE

1.   An inside bar.

2.  The next bar has a higher high and higher low.

3.  Place sell order at the low of the original inside bar for the next three bars.

4.  Cancel order if not triggered after three bars.

WINNING TRADE – HIKKAKE TRADE SETUP

This is a daily chart of Cairn Energy listed on the London Stock Exchange. We had an inside bar, followed by a bar with a higher high and higher low, providing us with a Hikakke setup. We placed a sell order at the low of the inside bar. Two days later, price triggered the sell order and the stock went plummeting into profits.

This was an excellent trade as there was a downwards trend followed by a series of five bullish bars, which gave reasonable hope to the bulls. Hence, bullish traders saw the inside bar as a low-risk entry for a trend reversal upwards. Note that the inside bar had a good follow through, but not good enough to even test the bear trend bar three bars before.

When the Hikkake setup came along, price went south and stopped out the bulls. However, the hope for a reversal was strong and prices went back to test our entry price two bars later. When that test failed too, the downwards trend continued.

LOSING TRADE – HIKKAKE TRADE SETUP

This is a daily chart of International Power PLC. We saw a bearish inside bar followed by a bar with a higher high and higher low. We placed a sell order at the bottom of the inside bar. An outside bar triggered the sell order. Prices began to drift upwards after that and we lost the trade.

There were two main reasons not to take this trade. First, price broke a bear trend line (not drawn) before forming a higher low (six bars before the inside bar), hinting at a bullish context which was bad for shorts.

Next, for a short Hikkake to succeed, we have enough traders betting on a bullish breakout of the inside bar. However, as both the inside bar and the bar before it were bearish, traders were unlikely to bet on a bullish breakout. Moreover, it looked like a double top, which again deterred bullish traders. Without bullish traders trapped, this short Hikkake did not look good.

REVIEW – HIKKAKE TRADE SETUP

This trade setup illustrates the concept of trapped traders. From whom do you think your profits come from? You always profit at other traders’ loss. This is a fact of the market.

The inside bar has a smaller range and hence a smaller risk. This low-risk inside bar opportunity tempts many traders . The Hikkake pattern then sets up to enter when these traders have to exit with a loss. Understanding this concept of trapped trader will help you find the best Hikkake trading setups, which occurs when price has trapped many breakout hopefuls.

However, an inside bar is a contraction in range and may lead to a tight trading range where price action becomes rather unpredictable. This explains why this setup often fails with an outside bar, which shows strength in both directions. Remember, the context gives the edge.

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