How to identify and trade with the hanging man candlestick pattern
Candlestick patterns are essential in determining the direction of a financial asset. In the past few weeks, we have looked at several candlestick patterns like the hammer and the morning star.
We have explained how they work and how they can help you identify trading opportunities.
In this piece, we will look at the hanging man and reverse hanging pattern, how it works and how you can use it in the market.
What is a Hanging Man Pattern?
As the name suggests, it is a candlestick pattern that happens when the financial asset is in an upward trend.
Whenever it does, it usually sends a signal that a reversal is about to happen. As you will see below, it is earily similar to the hammer.
Hanging Candle vs Hammer
The only difference is that the hammer is a bottom reversal line that appear during a decline.
Characteristics of the Hanging Man Candle
There are five many characteristics of the hanging man candle:
- Upward Trend – It happens when the price of an asset is in an upward trend as we have mentioned above.
- Opening Level – The opening level of the candle can either be bullish or bearish. Because it is a reversal pattern, the bearish candle is usually a better indicator of a weakening market.
- Upper Shadow – The candle needs to have a very small upper shadow. The reason is that this shadow show that bulls were attempting to continue with the bullish trend.
- Long Lower Shadow – There needs to be a long lower shadow, which shows that there was a significant sell off before bulls tried to regain some of the ground.
- Closing Level – The closing level needs to be below the open level. An illustration of the hanging man and the hammer is shown below.
How do you trade the Hanging Man ?
The hanging man is a reversal candle that happens when a bullish trend is about to turn. Therefore, the first thing you need to do is to identify a bullish trend. That can be in a 30-minute, one-hour, or chart with any period.
Second, identify when the candle is forming the pattern shown above.
In most cases, opening a short position when the hanging man candle forms is not an ideal situation.
This is because in certain times, the reversal does not happen. Therefore, you should wait and see that the downward trend is forming.
Ideally, you should enter the trade after the third red or bearish candle because it will confirm that the bears are taking over.
Example of a hanging man candle
The chart above shows a hanging man pattern on the EUR/USD pair.
As you can see, the pair was in an upward trend when the hanging pattern happened. This became the starting point of a new reversal trend.
What about a reversal hanging man ?
A reversal hanging man is very similar to the hammer pattern. It happens in a downward trend and is usually a signal that the trend is about to reverse.
A good example of this pattern is shown on the daily chart of the EUR/USD pair.
Benefits of using the Hanging Man Candlestick Pattern
There are several benefits of using the hanging man pattern.
- Accurate most of the times.
- Easy to spot.
- Easy to use with other reversal indicators like the double EMA.
The hanging man is one of the many candlestick patterns.
Other popular ones are the Doji, Morning Star, The Window, and cloud covers among others.
Using these patterns can help you identify the ideal points to enter and exit trades.