The Hikkake pattern is a simple price action or candlestick pattern that is used to find market turning points.
The pattern is essentially an inside day with a fake breakout and is originally credited to Daniel Chesler CMT.
The website oxfordstrat also talks about the Hikkake pattern and shows some robust performance in some futures markets.
In this post, we will test the pattern to see if it has any profit potential when applied to US stocks.
Bullish Hikkake Pattern Rules
For this test I will define the rules of the Hikkake Pattern as follows:
- The first bar is an inside bar
- The second bar has a lower high and a lower low than the first bar
The formula I will be using for this pattern is as follows:
BullishHikkake = (Low > Low AND High < High) AND (Low AND High < High);
Following is an example of the bullish Hikkake pattern in action in CBS. Here we go long on the open after the pattern and exit five days later:
Testing the Bullish Hikkake Pattern
Before devising any sophisticated trading strategy it is a good idea to first test the raw profit potential of the pattern on the historical data without any money management or transaction costs.
I therefore tested all occurrences of the Hikkake pattern on S&P 500 stocks between 1/2008 – 1/2018 and produced the following results with a 1-day holding period. Entries are executed on the next day open following the pattern:
You can see that buying a Hikkake pattern on the next day open and exiting one day later produced an average profit of 0.03% per trade on S&P 500 stocks with a 51.56% win rate. You can also see that this is an extremely common pattern.
Unfortunately, this result is no better than the benchmark result (average daily profit for all stocks in the sample) and is not large enough to cover transaction costs.
Next, I tested the pattern on the same sample of stocks but increased the holding period:
You can see that we get a larger average profit of 0.37% per trade if we extend the holding period to five days. We are doing better than the benchmark result now and the win rate has crept up to 55%.
Full Table Of Results
Following you can see a table of results of my full research into the Hikkake pattern. I ended up testing three different stock universes across three holding lengths.
In this article we looked at the profitability of the Hikkake candlestick pattern when applied to US Stocks. Unfortunately, we did not find any real edge with this pattern.
This is a very common pattern that likely needs a lot more refinement.
This pattern compares unfavourably with some of the other traditional patterns that I analysed in the course Candlestick Analysis for Professional Traders.
It may work in other settings but in our analysis we did not find much edge.
Simulations in this article produced with Amibroker with data from Norgate Premium. Data is adjusted and assumes no transaction costs. All trades executed on the next day open.
Thank You For Reading
Joe Marwood is an independent trader and the founder of Decoding Markets. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies. If you are interested in more quantitative trading strategies, investing ideas and tutorials make sure to check out our program Marwood Research.
This post expresses the opinions of the writer and is for information or entertainment purposes only. It is not a recommendation or personalised investment advice. Joe Marwood is not a registered financial advisor or certified analyst. The reader agrees to assume all risk resulting from the application of any of the information provided. Past performance, historical or simulated results are not a reliable indicator of future returns and may not account for real world settings. Financial trading is full of risk and margin trading can lead to financial losses totalling more than what is in your investment account. We take care to present accurate analysis but mistakes in backtesting and presenting of analysis regularly occur. Please read the Full disclaimer.
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