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.

RELATED TERMS
  1. Three Stars in the South

    The three stars in the south is a three-candle bullish reversal ...
  2. Ladder Bottom/Top

    The ladder bottom and ladder top are five-candle reversal chart ...
  3. Morning Star

    A morning star is a bullish candlestick pattern in a stock's ...
  4. Reversal

    A reversal is a change in the direction of a price trend, which ...
  5. Counterattack Lines

    The counterattack lines pattern is a two-candle reversal pattern ...
  6. Bullish Harami

    Bullish Harami is a basic candlestick chart pattern indicating ...
Related Articles
  1. Trading

    Advanced Candlestick Patterns

    Learn how to identify and trade the island reversal, kicker, hook reversal and three gap advanced candlestick patterns.
  2. Trading

    Candlesticks and Oscillators for Successful Swing Trades

    Take advantage of short-term price moves by pinpointing reversals using candlesticks and oscillators.
  3. Trading

    Most Commonly Used Forex Chart Patterns

    Greatly improve your forex trading by learning these commonly used forex chart patterns that provide entries, stops and profit targets.
  4. Investing

    Market Reversals and How to Spot Them

    Learn what market reversals are and a method that can be used to spot and trade them, called the sushi roll strategy.
  5. Trading

    Heikin-Ashi: A Better Candlestick

    A valuable tool in technical analysis, Heikin-ashi charts smooth out the price action, and with candlestick charts can make it easier to spot trends and reversals when trading.
  6. Investing

    Find Turning Points With Single-Day Patterns

    On their own, single-day patterns can be unreliable, but that doesn't mean they can't be used effectively.
  7. Trading

    Continuation Patterns: An Introduction

    Learn the most common varieties of continuation patterns and how they work in market analysis.
  8. Trading

    Harmonic Patterns In The Currency Markets

    Learn how to take geometric price patterns to the next level by using Fibonacci numbers to predict movements in the forex market.
RELATED FAQS
  1. What are the differences between a bar chart and candle sticks?

    Explore the difference between bar and candlestick charts. Learn how technical analysts use charts in the analysis of supply ... Read Answer >>
  2. What Do You Call a Candlestick With No Shadows?

    A candlestick with no shadow is seen as a strong signal of conviction by either buyers or sellers. Read Answer >>
  3. What do the different colored candlesticks mean?

    A typical candlestick chart is composed of a series of bars, known as candles, which vary in height and color. Read Answer >>
  4. What are the main differences between a Doji and a Spinning Top pattern?

    Identify the differences between doji candles and spinning tops on a candlestick chart, and learn how traders look at each ... Read Answer >>
Trading Center