Do you trade Japanese candlestick chart patterns? Is the bearish engulfing pattern part of your game plan? If
Are you searching for a forex indicator that identifies reversals? If so, the hanging man candlestick pattern may be just what you are looking for.
The hanging man is a Japanese candlestick pattern that signals the reversal of an uptrend. This article will cover identifying, interpreting, and trading the hanging man.
What is the Hanging Man Candlestick Pattern?
The hanging man candlestick pattern is a single-candle formation, much like other single candle pattern like the bullish harami pattern, or the Doji star pattern, for example. It forms during an upward trend and signals a potential reversal. The hanging man consists of a small body with an elongated lower wick.
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How to Identify and Use the Hanging Man in Forex Trading?
The hanging man formation signals a trend reversal. Best of all, it’s simple to identify and use. As you can see in the EUR/USD chart below, the hanging man occurs during an uptrend.
It’s important to note that all hanging man candlestick patterns are bearish reversal formations. However, there are three variations: neutral, bearish, and bullish.
It’s a point of debate whether or not a hanging man can also be a Doji pattern on candlestick charts. If a candle meets the following criteria, one may consider it to be a neutral hanging man candle:
- The candle’s opening and closing price are the same.
- The candle has a short upper shadow.
- The candle has a long lower shadow.
- The candle occurs during a bullish trend.
A bullish hanging man pattern occurs when a candle’s closing price is above its opening price. This formation is illustrated by a green or hollow candle.
A bearish hanging man pattern occurs when a candle’s opening price is above the closing price. A red or solid candle illustrates this formation. Of the three types of the hanging man pattern, this one is the strongest reversal signal.
Hanging Man vs. Hammer
- A hammer is a bullish reversal pattern. It forms within a downward trend.
- A hanging man is a bearish reversal pattern. It develops within an upward price direction.
- Hammers signal buying opportunities.
- Hanging man patterns signal selling opportunities.
Both the hanging man and hammer feature a long lower shadow and a small body. If you see a long upper shadow, it isn’t a hanging man or hammer.
How to Trade Forex Using the Hanging Man Candlestick
Trading the hanging man candlestick pattern is easy once a bullish trend is identified and a hanging man candle formation appears. All one needs to do is find a market entry point, set a stop loss, and locate a profit target.
Pinpoint Market Entry
As a bearish reversal pattern, the hanging man pattern forms during an upward price trend. Accordingly, the market is entered to the short as follows:
- Sell beneath the lower wick of the completed hanging man candle.
- This may be done with a stop-limit, stop-market, or market order.
- The new short position is open once a bearish candle triggers entry.
Set Stop Loss
Stop losses for a hanging man short are located above the candlestick pattern. This is done as follows:
- A stop-loss order is placed above the upper shadow of the hanging man candle.
- The exact location must be one or more pips above the upper shadow.
Locate Profit Target
A profit target may be located once the entry and stop-loss orders are active. To do so, execute the following steps:
- Select a desirable risk vs. reward ratio.
- Using the hanging man candle’s range, apply the ratio.
- Place a buy limit order as the take profit.
Example: Trading the Hanging Man as a Bearish Reversal Pattern
Perhaps the most significant advantage of trading candlestick patterns is that they are user-friendly. The hanging man is no different. Identify an upward trend, spot the hanging man pattern, and set up the trade. Check out the chart below for an example of a EUR/USD short.
- Identify the formation in the upward trend.
- A sell order is placed at 1.1342.
- The stop-loss order is placed at 1.1355.
- Using a 1:2 risk/reward ratio, the profit target is 1.1316.
- The short position is opened upon a bearish candle confirming market entry.
The Hanging Man Chart Pattern – Pros and Cons
Every form of technical analysis has pros and cons. Here are a few of each for the hanging man pattern.
- Has a distinct appearance
- Intuitive and easy to trade
- Found on all forex pairs and time frames
- Can produce false signals
- Not as effective on shorter time frames
- Large hangman candles can be expensive to trade
Here are the key takeaways you need to consider when using the hanging man pattern.
- The hanging man pattern is a single-candle bearish reversal indicator. It occurs during uptrends in price.
- The formation comes in neutral, bullish, and bearish varieties. The bearish version is accepted as having the highest efficacy.
- To trade the pattern, place a sell order beneath the lower shadow of the candle. Stop losses are above the upper shadow, with profit targets beneath entry.
- The hanging man is not infallible. Proper risk management is recommended when trading the formation.
Below are some of the most frequently asked questions regarding the hanging man.
Is the hanging man reliable?
Yes, the hanging man is one of the most accurate single candlestick patterns. However, no technical tool is 100%. Be sure to utilize this powerful formation within the context of a comprehensive trading plan.
Are candlestick charts better than OHLC charts?
There is no right or wrong answer to this question. However, when it comes to pattern recognition, candlesticks are inherently useful.
I am an average retail trader. Can I trade chart patterns such as the hangman candle?
Yes. Choose a smaller chart periodicity. By doing so, your stop losses will be tighter as each candle’s range will be reduced.
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