Price action trading can be a rewarding trading strategy for traders who truly understand how the markets work. While there are many stand alone price action trading patterns and strategies such as shorting a bearish engulfing pattern or going long on a Piercing Line pattern, the problem is that these patterns which are based off just two price bars do not have a good success rate. Of course, any trader worth his salt would know not to trade purely based on candlestick patterns.
With the Hikkake pattern, which comprises of 3 bars, the odds of having a successful trades are much higher, especially when combined with Bollinger Bands. The bands, as we know are used to measure volatility and is based on the concept of mean reversion.
Combining price action with a pattern such as Hikkake with Bollinger bands offers a reasonable success. In this article we look at a trading strategy that is simple and offers a good risk/reward ratio.
Hikkake – Bollinger Band Strategy
For the chart set ups, we only use the default Bollinger Bands with a setting of 20, 2 Close. There are no other indicators that are required.
Once the bands are set up, its time to scan the charts for inside bars which forms the basis of the Hikkake Pattern. It is essential to spot an inside bar at either the upper or lower Bollinger Bands. While it is not essential for price bars to cut across the upper or lower bands, it offers a bit more confirmation. However, a mere tag of one of the upper or lower bands is more than enough.
Long Set Ups
For the Hikkake Bollinger Bands long trade set ups, we look for the Hikkake pattern to form near the lower Bollinger Band. Once we notice the inside bar failure, which is nothing but the Hikkake pattern, we can then set up a pending order.
For entry price, we select the high of the inside bar, with stops at the low of the Hikkake bar. For targets, we select the Bollinger Band mid) value of the inside bar.
Long Trade – Example
Short Set Ups
For short set ups, look for inside bar/Hikkake bar to form near the upper end of the Bollinger Bands. Once the set up is identified, the entry is taken at the low of the inside bar with stops at the high of hikkake bar and the target price is set to the mid-Bollinger Band value of the inside bar.
Short Trade – Example
Hikkake Bar – Bollinger Band Strategy: Dealing with trades
Setting targets: While a quick scan on charts will show that price tends to break the middle band and often tags the lower band, it would tempt a trader to increase their target levels. However, there are instances where price tends to reverse right after tagging the mid-Bollinger Band value. Usually in such cases, price tends to reverse quite fast, which makes it risky.
Risk/Reward: Another aspect of the Hikkake/Bollinger Band strategy is that not all trades are made equal. Meaning, in some cases, despite a good Hikkake set up, the mid Bollinger Band is too close to entry price, which makes it worthless to take the trade.
3 bars or more?: This is a question that is often asked… whether if its OK to take a trade if the price is triggered after more than 3 bars. While there are trades that we see which do result in profit, it would be a weak Hikkake trade to take on and the risks are more. However, such longer Hikkake patterns are formed quite often as compared to the 3 bar Hikkake formation at the upper or lower Bollinger bands. So its basically up to the trader to decide if they want to take on the trade. Of course, if the risk/rewards are convincing enough, then it definitely warrants a trade.
Why trade the Hikkake Bar/Bollinger Band Set up?
- Simple and easy to use
- Comes with defined entry/stop and target prices
- Can be used on any time frame
- Strategy can be implemented on any trading platform or charting tool
- Has a very high hit-rate
- Requires only Bollinger Bands indicator
- The ‘text-book‘ pattern doesn’t appear too often
- Not suited for traders who like action and quick profits
- Risk/Reward at times may be unappealing
- Price action scanning for Hikkake pattern may put off some traders
- Lesser set ups can drive impatience making the trader to take on trades impulsively
- Risk/Reward is usually 1:5 or 1:2 at the max