The "Hikkake pattern" in forex is a price action trading strategy used to identify potential reversals in the market. The term "Hikkake" is derived from a Japanese word that means "to hook" or "to catch," reflecting the pattern's nature of trapping traders into false moves before the market reverses direction. This pattern is often associated with false breakouts and is utilized by traders to capitalize on sudden price movements.

Characteristics of the Hikkake Pattern

1. Formation:

   • The Hikkake pattern typically consists of two distinct price action phases: a false breakout followed by a reversal.
   • It generally occurs after a period of consolidation or a well-defined price range, where the price has been oscillating within a certain range.

2. Steps of the Hikkake Pattern:

   • Initial Breakout: The price briefly breaks above a resistance level (or below a support level) with a strong candlestick. This breakout can entice traders to enter positions expecting the trend to continue.
   • False Move: After the breakout, the price quickly reverses and moves back within the prior range. This traps traders who entered based on the breakout.
   • Confirmation: The pattern is confirmed when the price moves decisively in the opposite direction, typically breaking below the low of the false breakout for a bearish Hikkake, or above the high for a bullish Hikkake.

3. Trading the Hikkake Pattern:

   • Entry Point: Traders typically enter a position when the price confirms the reversal after the false breakout. For a bullish Hikkake, this would be when the price breaks above the recent high, while for a bearish Hikkake, it’s when the price breaks below the recent low.
   • Stop-Loss: Stops are usually placed just above the high of the false breakout for bullish trades, and below the low for bearish trades, to limit potential losses in case of a genuine continuation of the original breakout.
   • Take-Profit: Profit targets can be set based on previous support/resistance levels or using a risk-to-reward ratio.

4. Market Context:

   • The Hikkake pattern can occur in any market and on any time frame, but it tends to be more effective in trending markets or when significant news events are anticipated.
   • Traders often look for additional confirmation, such as increased volume or other technical indicators, to validate the strength of the reversal.

5. Benefits of Using the Hikkake Pattern:

   • The Hikkake pattern is advantageous because it helps traders avoid false breakouts by providing a clear signal when the price is ready to reverse.
   • It is based on the psychology of market participants, as the initial breakout attracts attention, leading to a rapid change in sentiment when the price reverses.

Overall, the Hikkake pattern is a useful tool for traders looking to capitalize on market reversals after false breakouts, offering a straightforward approach to identifying potential entry points in the forex market.