Guide to trading with the Hanging Man pattern Strategies and tips -

Guide to trading with the Hanging Man pattern Strategies and tips

Author: Michael view: 48 Update: 22/11/2023 Downloads: 0

The Hanging Man pattern is one of the Japanese candlestick patterns commonly used in technical analysis. This is a signal of a reversal from an uptrend to a downtrend, often appearing after a strong price increase. In this article, we will learn about the characteristics of the Hanging Man pattern, how to recognize and use it in trading, as well as the benefits and risks of trading with this pattern.

Introducing the Hanging Man model

Hanging Man Candlestick: Importance, Features and Benefits

The Hanging Man pattern is a Japanese candlestick pattern with a small candle body and a lower shadow at least 2 times longer than the upper shadow. It often appears after a strong price increase, signaling that buying pressure is weakening and selling pressure is starting to increase. This pattern can be considered a signal of an uptrend reversal to a downtrend.

In English, “Hanging Man” means “hanging man”. The name is taken from the shape of the pattern on the chart, when the small candle body and long lower shadow create an image that resembles a person being hanged. Despite its rather scary name, the Hanging Man model offers many attractive trading opportunities for investors.

Characteristics of the Hanging Man model

The Hanging Man model has the following characteristics:

  • Have a small candle body, maximum length of 2/3 of the previous candle body.
  • The length of the lower shadow is at least 2 times longer than the upper shadow.
  • The close is near or at the low of the candle.

To better understand these characteristics, let’s look at the chart example below:

How to Trade Reversals with the Hanging Man Pattern

In this example, we have a Hanging Man pattern that appeared after a strong price increase. The candle body is small and the lower shadow is at least 2 times longer than the upper shadow, closing near the lowest level of the candle. This is a clear signal that buying pressure is weakening and selling force is starting to increase.

Structural analysis of the Hanging Man model

The Hanging Man pattern often appears after a strong uptrend. In an uptrend, prices will often close higher than they opened. However, with the Hanging Man pattern, the closing price is lower than the opening level, signaling that buying pressure is weakening.

The long lower shadow of the Hanging Man pattern shows that selling pressure has begun to increase. This may be because investors are starting to take profits after a strong price increase. Without strong support from other investors, the price may continue to fall and create a new downtrend.

To determine whether a Hanging Man pattern is highly authentic or not, we need to consider other technical factors such as trading volume and other technical indicators. If the pattern appears in an important price range or is combined with other signals, the possibility of this pattern reversing the trend will be higher.

How to recognize the Hanging Man pattern on the chart

Learn Hanging Man Candlestick Patterns | ThinkMarkets | EN

To recognize the Hanging Man pattern on the chart, you need to identify the following characteristics:

  • Have a small candle body, maximum length of 2/3 of the previous candle body.
  • The length of the lower shadow is at least 2 times longer than the upper shadow.
  • The close is near or at the low of the candle.

Additionally, you can use technical indicators to identify the Hanging Man pattern. For example, use a moving average to identify the main trend and identify the Hanging Man pattern within that trend. You can also use other technical analysis indicators such as RSI, MACD or Stochastic to determine the overbought or oversold level of the market.

Trading signals with the Hanging Man pattern

The Hanging Man pattern can be used to give the following trading signals:

  • Sell ​​Signal: When the Hanging Man pattern appears in an uptrend, it can be a sign that the trend is about to end and the price may decline in the future. In this case, you can place a short sell order when the price closes below the candle’s low.
  • Waiting signal: If the Hanging Man pattern appears in a downtrend, it can be a sign that the trend is about to end and the price may increase again in the future. In this case, you can place a buy order (long) when the price closes above the candle’s high.
  • Reversal signal: If the Hanging Man pattern appears in an important price range or in combination with other signals, it can be a sign of a trend reversal. In this case, you can place a buy or sell order when the price crosses the high or low of the candle.

However, as with any other trading pattern, no signal is 100% certain. Therefore, you need to use other indicators and techniques to determine the authenticity of the Hanging Man pattern before deciding to trade it.

Trading techniques with the Hanging Man pattern

There are many ways to apply the Hanging Man model to different trading strategies. Here are some popular trading techniques with this pattern:

  • Breakout Technique: This technique uses the Hanging Man pattern as a signal to make trading decisions. If the pattern appears in an important price zone, you can place a buy or sell order when the price crosses the high or low of the candle.
  • Pullback technique: This technique uses the Hanging Man pattern as a signal to place orders at important price zones. If the pattern appears in an uptrend, you can place a short sell order when the price pulls back (declines) to that important price range.
  • Divergence technique: This technique uses the Hanging Man model combined with other technical indicators such as RSI, MACD or Stochastic to determine the authenticity of the model. If the pattern appears in an important price range and there is a divergence between the price and the indicator, this can be a highly authentic trading signal.

Benefits and risks when trading with the Hanging Man pattern

The Hanging Man model can bring many benefits to investors, but it is also indispensable for risks. Here are some benefits and risks of trading with this model:

Benefit

  • Reversal signal: The Hanging Man pattern can indicate a trend reversal, helping investors initiate a new trading position and take advantage of profit opportunities.
  • Easy to recognize: With clear and recognizable characteristics, the Hanging Man pattern is one of the simplest Japanese candlestick patterns to apply in trading.
  • Combined with other techniques: The Hanging Man pattern can be combined with other indicators and techniques to determine its authenticity and increase the likelihood of trading success.

Risk

  • Not a sure signal: As mentioned, no signal is 100% sure. Therefore, the use of the Hanging Man model needs to be combined with other techniques and indicators to make trading decisions.
  • Can appear in normal markets: The Hanging Man pattern can appear in normal markets without being a reversal signal. Therefore, determining the authenticity of the model is very important.
  • Investment Value Risk: Trading always involves risk, and using the Hanging Man model is no different. If you do not manage risk well, you can lose your investment.

Trading strategies with the Hanging Man pattern

Here are some popular trading strategies with the Hanging Man pattern:

  1. Breakout strategy: Place a buy or sell order when the price crosses the highest or lowest level of the Hanging Man candle.
  2. Pullback strategy: Place a short sell order when the price pulls back to an important price range after the appearance of the Hanging Man model in an uptrend.
  3. Divergence Strategy: Combine the Hanging Man model with other technical indicators to determine authenticity and place orders at important price zones.
  4. Stop-loss strategy: Set stop-loss (stop-loss price) at the highest or lowest level of the Hanging Man candle to minimize risk.
  5. Take-profit strategy: Set take-profit at the next price level in a trend reversal or at the nearest price in case the trend continues.

Practice trading with the Hanging Man model

To practice trading with the Hanging Man pattern, you can follow these steps:

  1. Choose a currency pair or other asset to trade.
  2. Identify major market trends using technical indicators or chart analysis.
  3. Look for the Hanging Man pattern on the chart and determine its authenticity using other techniques such as RSI, MACD or Stochastic.
  4. If the pattern is highly authentic, place a buy or sell order corresponding to your chosen trading strategy.
  5. Set stop-loss and take-profit to manage risk and profit.
  6. Track and manage your trades.

Summary and advice when trading with the Hanging Man pattern

The Hanging Man pattern is one of the simplest and most popular Japanese candlestick patterns in technical analysis. It can bring many benefits to investors but is also indispensable for risks. Therefore, the use of this model should be combined with other techniques and indicators to make accurate trading decisions.

Advice for new investors is to practice and test the trading strategy with the Hanging Man model on a demo account before applying it to real trading. You should also always manage risks and be disciplined in trading to achieve long-term success.

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