How to Use The Hanging Man Candlestick Pattern
For Forex Trading
The Hanging Man Candlestick pattern provides downtrend reversal signals, which helps traders place sell or short orders to profit off falling markets. You can identify the increase in selling interest and trade currency pairs accordingly. In this article, we discuss the Hanging Man Candlestick Pattern in depth:
What is the Hanging Man Pattern?
The Hanging Man is a candlestick pattern that forms during an uptrend and signals a downtrend reversal. It indicates a sharp selling pressure increase at the top of an existing uptrend. When traders identify a Hanging Man pattern, they enter short or sell trades to profit from the expected downtrend. The Hanging Man formation is a bearish pattern with a high closing price and a long lower shadow with no upper shadow. The pattern indicates that the bears in the market are overpowering the bulls. It is easily spotted in the charts because of its extremely long lower shadow/wick. When the first Hanging Man candlestick is continued by a second long bearish candlestick, the reversal is confirmed. At this point, traders can place their short or sell orders.
What does the Hanging Man Pattern indicate?
A Hanging Man Pattern indicates a trend reversal in an existing long-term trending market. Since it appears during an uptrend, it indicates selling opportunities. The pattern looks like a hammer since it has a small body and a really long lower wick, which indicates a strong bearish activity in the market. With high selling pressures, traders use this pattern to enter short trades.
- If the Hanging Man candlestick closes above the opening price, it is considered a bullish candlestick indicating entering opportunities.
- If the Hanging man candlestick closes below the closing price, it is considered a bearish candlestick indicating selling opportunities.
Can a Hanging Man Candlestick be bullish?
Yes, a Hanging Man candlestick can be bullish when the candlestick closes above the opening price. However, it provides a more reliable signal when it is a bearish candlestick. A trader can combine the Hanging Man bullish candlestick pattern with another reversal strategy like stochastic oscillators or RSI to confirm a bullish trend reversal signal.
Example of Hanging Man
Let us consider that you are trading EUR/USD on a 4-hour chart at 1.5. The currency pair is currently in an uptrend where the Hanging Man candlestick appears at the top of the uptrend. The candlestick appears at 1.9, the resistance level of the currency pair. At this level, you look for a reversal to occur after the uptrend ends. After trading around it for a day, the price starts breaking below the resistance level. The prices come down from 1.9 to 1.7, 1.5 and start trading around 1.2. The currency pair price breaks below the lowermost point of the Hanging Man pattern. This gives you an entry signal to short the trade due to the expected downtrend. You can place a stop-loss order at the resistance level of 1.9 and manage trading risk efficiently. After entering the short trade, you can look to sell the existing trades after the market trades in a downtrend for a long period of time. When the consecutive candles after the Hanging Man patterns move in the lower direction with lower high prices and lower low prices, the downtrend is confirmed, and any long trades should be exited.
What are the main characteristics of the Hanging Man?
1. Existing upward trend
A Hanging Man pattern is always formed in an existing upward trend. It is identified at the top-most price level of the uptrend.
2. No upper shadow
A Hanging Man candlestick has no or small upper shadow. This indicates that the currency pair’s closing price equals the high price level, and bearish momentum is coming. The no shadow in a Hanging Man pattern indicates that before a significant drop in the prices, the currency pair has maintained the uptrend.
3. Opening price level
The Hanging Man candlestick opens near the top-most price level of an uptrend. It mostly ranges around the resistance level of the currency pair, indicating a bearish reversal soon after.
4. Long lower shadow/wick
The Hanging Man candlestick has an extremely long lower shadow that indicates strong selling pressure. This marks a huge gap between the lower price level and the opening price of the candlestick, implying that bears are taking over the bulls and it is time to place short orders and exit long orders.
5. Closing price level
The closing price level of this pattern is below the opening price level. This confirms that a bearish reversal is occurring, and traders should place sell orders.
How to spot a Hanging Man Pattern?
The Hanging Man Pattern indicates a trend reversal and is made of a small candlestick body with an extremely long lower wick. Most of the time, the candlestick has no upper wick or a small one. Hence, identifying it becomes easy since traders can easily spot it amongst other candlesticks. The pattern provides the most reliable trading signals when it occurs at the top of an uptrend, near the resistance level of the currency pair. One must know what a price trend, price swing, support price, market momentum and resistance price levels are to successfully spot the pattern on a price chart. The Hanging Man Pattern appears as a single candlestick but confirms the trend reversal signals when it is followed by a bearish candlestick. Here are the things to keep in mind to spot a Hanging Man Pattern -
- It appears at the topmost level of an uptrend.
- It can have a bullish (green) or bearish (red) body.
- The lower wick is at least twice the size of the candlestick’s body.
- It has a negligible upper wick.
How to trade the Hanging Man Candlestick Pattern?
1. Identify the existing uptrend
Open a longer time frame on the currency pair chart to identify the direction of the market. If there is an existing uptrend in the market, there is a strong possibility of the Hanging Man candlestick appearing at the top of the trend.
2. Identify the entry price level
The shorter (hourly) time frames can be used to spot the price level at which you can enter a short trade. The Hanging Man candlestick pattern provides you with an ideal buy level to enter a short trade near the closing price level.
3. Combine the Hanging Man candlestick with other indicators
Combining the Hanging Man candlestick pattern with other reversal indicators like the Relative Strength Index helps you confirm the market reversal. When the RSI indicator oscillates equal to or above 70, it indicates that the currency pair is overbought and the market will reverse in a downtrend. At this point, the bearish reversal is confirmed, and you can move forward with entering short trades.
4. Place a trading order
After you have confirmed where you want to place a short order, at the lower level of the Hanging Man candlestick pattern, near the closing price, this will help you trade the falling markets by shorting the trades.
5. Manage Risks
The next step of trading the Hanging Man candlestick is to manage risk through risk management strategies. You can place the stop-loss order at the high price level of the candlestick to minimise losses from markets moving against you. On the other hand, the take-profit orders can be placed near the lowermost level when shorting a trade. The distance between your entry and take profit level can be twice the distance between the stop loss and entry price level for successful trading.
6. Exit the trade
After analysing and monitoring the market in the downtrend, you can exit the short trades once you believe that the bearish trend is going to end. When the currency pair price starts trading near its support level, it is a good time to get out of the trade. This is because once the currency pair prices touch the support level, the markets will reverse and start trading in the uptrend.
Hanging Man vs Shooting Stars and Hammers
Shooting Stars and Hammers are similar to the Hanging Man Candlestick Pattern.
- The Shooting Star Candlestick Pattern is a bearish market signal that has. Along the upper wick with a small to no lower wick. Its real body is small and trends near the low-price level, appearing after a continued uptrend. It provides traders with a signal to short or sell the trade.
- The Hammer Candlestick pattern is a bullish trading market that occurs after an existing downtrend. It indicates that the currency pair has reached its lowermost level and can reverse into an uptrend anytime now. This pattern signals traders to enter long trades in the market due to the expected uptrend.
The difference between Hanging Man and Shooting Star is that even though they both appear at the top of an uptrend, the small body of the Hanging Man candlestick is near the top-most part of the candlestick with a lower long wick. However, the Shooting Star pattern has a small candlestick body near the lower part of the candlestick and a long upper wick. So, we can say that a Shooting Star candlestick is a Hanging Man candlestick reversed. In both patterns, the longer wick is at least twice the size of the lower wick. Both indicate a bearish momentum in the market. On the other hand, the Hanging Man Candlestick pattern and the Hammer Candlestick pattern are both reversal patterns. The difference between the two is that the Hanging Man Candlestick Pattern occurs during an uptrend and indicates a bearish reversal, whereas the Hammer Candlestick Pattern occurs during a downtrend and indicates a bullish reversal. Hence, traders are signalled an ideal entry price level for short trades in the former pattern and ideal entry levels for a long trade in the latter. Every other element in these two patterns is identical.
Trade the falling markets with the Hanging Man Pattern today
The Hanging Man Candlestick Pattern provides reliable and accurate signals to short trades and profit from falling markets. It is easy to spot even in volatile markets due to its unique shape, small body and long lower wick. When used with other reversal indicators, traders can trade reversing markets accurately. Start trading with Blueberry Market’s forex trading platform to use the Hanging Man pattern along with other indicators. Sign up for a live trading account or try a risk-free demo account on Blueberry Markets.
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