Millions of traders and investors worldwide attempt to make profits in financial markets by buying and selling various assets such as stocks, commodities, currency pairs, and cryptocurrencies. Succeeding in this market is directly related to enhancing analytical skills and creating strategies with precise timing. This is where technical analysis comes into play. Technical analysis is an attempt to predict future price movements by examining past price actions. There are many tools and indicators used in technical analysis, but one of the most popular tools is Japanese candlesticks. Known for being visual and understandable, candlesticks represent price movements graphically and can help us show the market sentiment and indicative reversals. This article discusses the "Hook Reversal candlestick pattern", an important pattern within Japanese candlesticks. This pattern is known as a formation that shows suggestive reversals or turns in the market. The Hook Reversal candlestick pattern typically has two main types:
- Bullish Hook Reversal
- Bearish Hook Reversal
Both types of Hook Reversal candlestick patterns are models
of a candlestick that can indicate a reversal in the direction of a price
movement. This pattern can signal the end of an uptrend or a downtrend. The
Hook Reversal candlestick pattern is characterized by a large body and a small
"hook." The hook is shorter than the body of the candle and is
normally directed towards the top or bottom of the candle.
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| Hook Reversal Candlestick Patterns |
Topic: Hook Reversal
Type: two-way
Trend direction: Reversal
1. Bullish Hook Reversal
Formation: The Bullish Hook Reversal candlestick
pattern is a formation consisting of two candles that indicates a reversal from
a downtrend to an uptrend:
- First Candlestick: A long bearish candlestick forms first. This candlestick is traditionally red or black and represents a decline. Sometimes, this candlestick may also have a long upper wick, which indicates that the price attempted to rise but ultimately failed. Prices are mostly bearish and the close of the first candle usually shows a downward momentum.
- Last Candlestick: During a continuing downtrend, a short upward-bodied candle forms that opens and closes below the previous candle's close. This candle is usually green or white. The second candle provides a signal that could halt or reverse the preceding downtrend. The shorter green candle represents the initiation of the reversal. A short upper wick indicates increased buyers this time, managing to push the price above the previous candle's open.
This formation suggests that the market may be sending a possible
reversal signal and that the downtrend may be weakening or reversing. In other
words, the bullish hook reversal candlestick pattern is a candlestick formation
that shows that a downtrend may be turning into an uptrend.
Interpretation: Bullish Hook Reversal is generally
interpreted as a reversal signal. The long black candle signifies seller
dominance, followed by a short green candle indicating buyer pressure. Upon
completion of the pattern, we can interpret it as sellers succumbing to buyer
pressure. Bullish Hook Reversal suggests a weakening of the downtrend and the probable
start of an uptrend. However, it's crucial to note that this pattern doesn't
guarantee a reversal, and prices can still continue in the direction of the
trend.
Trading with the Bullish Hook Reversal
If this pattern appears in the financial market where we
trade, we might consider entering a long position. Especially if it occurs in
oversold zone or at a support level, we should make the trade after confirming
it with technical indicators.
Entry: To determine the entry point, we can place a
Buy order after the close of the bullish candle (green or white), that is,
after the close of the second candle.
Stop Loss: The stop loss level is typically set below
the formation, ensuring that if the pattern becomes invalid, our losses are
limited.
Target: The target level is traditionally placed at
the height of the first candle. Additionally, compatible target levels can be
identified with other technical analysis tools such as previous resistance
levels, moving averages, or Fibonacci retracement levels. Take a look at the
example in the Ethereum/Bitcoin daily chart in cryptocurrency trading below:
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| Bullish Hook Reversal in ETH/BTC |
Never forget. While the Bullish Hook Reversal pattern can be
a strong signal of a reversal, it may be less reliable when it forms within a
strong underlying trend. Technical analysis patterns are not always definitive,
and unexpected moves can occur in the market. As with other candlestick
patterns, it is risky to make a buy or sell decision using this pattern alone.
It must be considered in conjunction with other technical indicators and market
analysis.
2. Bearish Hook Reversal
Definition: The Bearish Hook Reversal pattern commonly
indicates the end of an uptrend and the start of a new downtrend. This pattern
consists of two candles, with a shorter red candle forming after a long green
candle:
- First Candle: It begins with a long candlestick in an uptrend. This candlestick is usually green or white and represents the upward movement. In some cases, a long upper wick reflects the price's attempt to rise but ultimately fails.
- Second Candle: The second candle forms as a short downward candlestick that opens and closes above the close of the previous candle. This candlestick is usually red or black. The shorter red candle represents the beginning of the reversal.
In the Bearish Hook Reversal pattern, the formation of the
second candle indicates that it could halt or reverse the previous candle's
rise. Thus, this pattern is defined as a candlestick formation consisting of
two candles that signal the beginning of a decline.
Interpretation: Bearish Hook Reversal can be
interpreted as a sign of a price reversal in the financial market. While the
long green candle indicates buyer dominance, the short red candle represents
seller pressure. Upon completion of the pattern, it reveals the shift from
buyer pressure to seller pressure. The Bearish Hook Reversal pattern can be
seen as an indicator of a weakening uptrend in the market and a sign of a new
downtrend.
Trading with Bearish Hook Reversal
When the Bearish Hook Reversal pattern is complete, the
first thing that comes to mind is to enter a Short position. However, we should
not rush and trade based on this pattern alone. If the pattern occurs in an
oversold zone or near a resistance line, it will be safer to place a Sell
order after confirming it with technical indicators.
Entry: When determining the entry point, you might
consider entering the position after the close of the second candlestick, that
is, the downward (red or black) candle.
Stop Loss: The stop loss level can usually be a point
above the formation of the pattern, which we can use to protect our capital in
case of a possible reversal.
Target: The target level can be placed classically at
the low of the first candle. In addition, each trader can determine target
levels that are in line with other technical analysis tools, such as
risk/reward ratio, support levels, moving averages, or fibonacci retracement
levels, to suit their own trading strategy. Take a look at the following
example Ethereum/Dollar daily chart in cryptocurrency trading:
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| Bearish Hook Reversal in ETH/USD |
Please keep in mind that the Forex market is a risky
financial market where capital loss is possible. Trading decisions should be
made carefully and thoughtfully. Bearish Hook Reversal is a candlestick pattern
and does not guarantee a reversal on its own. To increase the reliability of
the pattern, it's necessary to use it alongside other technical indicators.