DEFINITION of 'Hook Reversal'

Hook reversals are short-term candlestick patterns that predict a reversal in the trend's direction. The pattern occurs when a candlestick has a higher low and a lower high than the previous session's candlestick. This pattern differs from engulfing patterns in that the size difference between the first and second bar's body can be relatively small.

BREAKING DOWN 'Hook Reversal'

Hook reversal patterns are popular candlestick patterns among active traders since they occur fairly frequently and are relatively easy to spot since the second candlestick changes to the opposite color. The strength and reliability of the pattern often depends on the strength of the uptrend or downtrend that preceded it, and most traders use other candlestick patterns, chart patterns, or technical indicators as confirmation of a reversal. After all, the pattern occurs relatively frequently, which leads to many false positives that must be discounted.

Hook reversal patterns are often classified as a type of harami or engulfing because the real body of the second candle forms within the body of the previous candle. They are also similar to dark cloud cover patterns where both real bodies are similar length. The key difference is that hook reversal patterns only require a small size difference, whereas harami and engulfing patterns emphasize large differences in sizes between candlesticks. In general, harami and engulfings tend to be less common and more accurate than hook reversal patterns in predicting a trend reversal.

Types of Hook Reversals

Hook reversal patterns can be either bullish or bearish reversal patterns:

  • Bearish Hook Reversals occur at the top of an uptrend when the open of the second candle is near the high of the first candle and the close of the second candle is near the low of the first candle. In other words, bulls are in control of the market early on before bears regain control and send the price sharply lower during the session.
  • Bullish Hook Reversals occur at the bottom of a downtrend when the open of the second candle is near the low of the first candle and the close of the second handle is near the high of the first candle. In other words, bears are in control of the market early on before bulls regain control and send the price sharply higher during the session.

Traders should set take-profit and stop-loss points for these reversals based on other technical indicators or chart patterns since hook reversals only indicate that a potential reversal is about to take place without providing insight into the magnitude of the reversal.

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