Most traders would agree that few things are more fun than riding steadily. tendency all the way up. Unfortunately, as the old saying goes, “All good things come to an end.” This is especially true for trading. As such, it is imperative to understand when a downturn is likely and how to manage risk accordingly. In this article, we will introduce what the Hanging Man candlestick reversal pattern is and how to trade it.
What is Hanging Man?
A hanging man candle (appropriately named) is a candlestick formation that indicates a sharp increase in selling pressure at the height of an existing uptrend. This is generally caused by many market participants believing that the market has reached an all-time high and as a result, the ‘bears’ are outstripping the ‘bulls’. this is, GBPUSD In the chart below, it’s clear that the red candle appears at the top of the uptrend as a result of mass selling pressure.
GBP/USD Hanging Man Candelabra
Features of the Hanging Man Candle
Hanging Man candles are characterized by a small body, little or no upper shadow (wick), and a lower shadow that is at least twice the length of the body.
- upward trend: The hanged man can only be identified as such when it forms at the top of an uptrend.
- opening level: Hanging man candlesticks are either green candles (bullish) or red candles (bearish), while bearish candlesticks are a better indication of market weakness.
- upper shadow: The small shadow above shows that the price tried to maintain the current uptrend before falling significantly. lb sterling.
- long shadow: This is probably one of the most insightful observations about the candle, and it caused a significant sell-off before the bulls could try to regain some ground, forcing the close to move somewhat closer to the opening level. However, it shows that it is still falling during the period.
- closing price: In this case, the closing level was below the opening level, thus confirming a bearish hanging man candle.
Identifying Hanging Man Candlestick Trading Signals
The Hanging Man Candlestick can be used to identify short trades (a bearish view of the market) as long shadows indicate a large sell. The true test of the legitimacy of the Hanging Man Candlestick is often revealed in subsequent chart activity. If the next candle moves further down and breaks below the short-term uptrend line, this can be seen as a continuation of the long-term downtrend. It is to start trading after the low price has passed.
Trade the hanging man?
It is important to look at the hanging man candle formation in relation to the long term trend. Multiple timeframe analysisStart by viewing the market using longer timeframe charts like daily or weekly timeframes to observe the direction the market is trending in the long term. (4 hours or 2 hours) to zoom in and analyze the ideal entry point for your trade.
Step 1: Identify long-term trends
View charts (perhaps daily charts) on longer timeframes to get an idea of the direction the market is heading. You don’t want to trade in the opposite direction of the long-term trend.
Step 2: Find your ideal entry point
Use shorter timeframe charts (4-hour charts) to identify ideal entry points. The Hanging Man Candle formation provides signals for short trades.
Step 3: Use Supporting Metrics
will you do Relative strength index Are you sure the market has reversed and is now trending down? Has the 20 SMA line crossed the 50 SMA line? Does the Hanging Man candle appear near the top of the short-term uptrend? Are Fibonacci retracement levels nearby?
Step 4: Make a Transaction
Look for entry points at the lows of the hanging man candlestick. If your bearish view of the market is correct, the subsequent price action will fall, signaling a short trade.
Step 5: When do you want to close the deal?
It is always best to have a risk to reward ratio of at least 1:2 whenever entering a trade. You’re risking half of what you’re getting. That is, the distance from the entry level to the take profit level should be twice the distance from the entry level to the stop loss level.
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