Dear readers, you should now understand the importance of candlestick analysis in technical analysis. Japanese candlesticks, one of the methods that help us predict price movements, can provide several advantages in our trading activities in financial markets. In particular, Japanese candlesticks have been developed over time and have had a game-changing impact on trading. Therefore, by understanding the reasons behind candlesticks, we can gain an advantage in our trading activities. The topic of this article will be the "Hanging Man" candlestick pattern, which is one of the candlestick patterns.
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| Hanging Man candlestick |
- Topic: Hanging Man
- Type: bearish
- Trend direction: reversal
- Opposite pattern: Inverted Hammer
What is a Hanging Man Candlestick Pattern?
The Hanging Man candlestick pattern is a bearish reversal formation that usually appears at the end of an uptrend in price action. It serves as a preliminary alert. This pattern suggests the upward drive is losing its steam, indicating that market sellers could soon seize the advantage. The pattern forms when buyers (bulls) have been pushing prices higher for a while, but near the top of the trend, the market shows the first signs of exhaustion. During the trading session, sellers (bears) manage to drive the price sharply lower, creating a long lower shadow on the candlestick. However, buyers attempt to regain control by pushing the price back up toward the opening level, leaving behind a small real body at the top of the candle.
This formation tells traders that buying interest is weakening and that selling interest is increasing, which may lead to an impending trend reversal. The body of the candle can be either red or green, but the most critical characteristic is the long lower shadow, which should be at least twice the size of the candle's body. When identified correctly, the Hanging Man pattern becomes a powerful signal that warns traders to prepare for a possible downtrend or price correction after a sustained rally. Many traders confirm the pattern's validity by waiting for the next candlestick to close below the Hanging Man's body, which strengthens the bearish signal.
Why is it Called the "Hanging Man"?
The name "Hanging Man" comes from the visual resemblance of the candlestick to a person hanging by their feet. The small body at the top of the candlestick represents the head, while the long lower shadow extending downward looks like the hanging body and legs. This imagery perfectly reflects the pattern's meaning. The market appears "hung" at the top before it eventually falls.
Just as a hanging man symbolizes an
unfortunate end, the Hanging Man candlestick pattern signals the end of an
uptrend and suggests a bearish reversal. The metaphor
highlights that although the price may still appear strong at the top, internal
weakness is already present.
How to Trade the Hanging Man Pattern?
The Hanging Man candlestick pattern appears at the final
stage of an uptrend and indicates a high probability of a trend reversal. When
the pattern forms, sellers start to push prices downward. This situation may
signal the beginning of a new bearish trend or a short corrective move within a
strong bullish trend. In either case, the Hanging Man pattern provides traders
with a notable sell signal.
It's important to note that while the Hanging Man is a reliable bearish signal, it should never be traded in isolation. Market context, trend strength, and confirmation from other indicators play a crucial role in determining the pattern's effectiveness. To trade effectively with the Hanging Man pattern, traders first confirm its validity by checking the price action in the next few candles. A strong bearish candle that closes below the Hanging Man's body is usually considered confirmation of the reversal. Many traders also combine this signal with volume analysis, support and resistance levels, or momentum indicators to strengthen their trading decisions.
A common trading approach is to open a
short position after the confirmation candle closes. Traders usually place a
stop loss just above the high of the Hanging Man. The next support level is
often used as the target for taking profit. Conservative traders may wait for
multiple confirmations, such as a break below a trendline, before executing
their trades.
- Sell (Short): A sell order can be placed below the lower end of the shadow or when a confirmation candlestick forms (such as the next candlestick closing downward).
- Stop Loss: The stop loss level is positioned slightly above the level where the pattern formed (upper end of the body) or slightly above the resistance level.
- Take Profit: The target can be set to the distance to the support level. Additionally, Fibonacci retracement levels and risk/reward ratios can be used.
Please refer to a trading example based on the "Hanging
Man" pattern on the Bitcoin/Tether chart.
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| Hanging Man Pattern on the BTC/USDT chart |
It's Essential to Remember: Every trade in the Forex market carries risk, and risk management is crucial. The Hanging Man pattern is not a reliable trading signal on its own. To increase the pattern's reliability, it should be evaluated in conjunction with other technical indicators. Risk management and emotional control are necessary for a successful trading strategy.