What is a hook reversal?
Hook reversals are short-term candlestick patterns that predict a reversal in the direction of the trend. The pattern occurs when a candlestick has a lower and a higher high than the candlestick from the previous session. This pattern differs from engulfing patterns in that the difference in size between the first and second bar bodies can be relatively small.
How a hook reversal works
Hook reversal patterns are popular candlestick patterns among active traders because they occur quite frequently and are relatively easy to spot since the second candlestick changes opposite color. The strength and reliability of the pattern often depends on the strength of the upward or downward trend that preceded it, and most traders use other candlestick patterns, chart patterns or technical indicators like confirmation of a reversal. After all, the pattern occurs relatively frequently, which leads to many false positives that should be ignored.
Hook reversal patterns are often classified as a type of harami or engulfing because the actual body of the second candle is formed in the body of the previous candle. They are also similar to the dark cloud cover models where the two actual bodies are of similar length. The main difference is that the hook reversal patterns require only a small size difference, while the harami and engulfing patterns emphasize the large size differences between the candlesticks. In general, harami and engulfing tend to be less common and more accurate than hook reversal models to predict a trend reversal.
Examples of hook reversals
The hook reversal patterns can be bullish or bearish reversal patterns:
- Bearish reversals of the hook occur at the top of an uptrend when the opening of the second candle is close to the top of the first candle and the closing of the second candle is close to the bottom of the first candle. In other words, the bulls control the market very early before the bears regain control and send the price significantly lower during the session.
- Bullish reversals occur at the bottom of a downtrend when the opening of the second candle is close to the bottom of the first candle and the closing of the second handle is close to the top of the first candle. In other words, the bears control the market very early before the bulls regain control and send the price significantly higher during the session.
Traders should set profit and stop-loss points for these reversals based on other technical indicators or chart models, as hook reversals only indicate that a potential reversal is about to occur without provide an overview of the extent of the reversal.