The interesting-sounding candlestick pattern of a hanging man is commonly used in trading. It does not appear very often but can be identified on various time frames in different markets. Moreover, the formation is easy to recognise on the price chart. It signals a potential reversal of the trend. How to recognise it and how to apply it in trading? Read today’s article and you will get the answers.
Identifying the hanging man pattern
The hanging man pattern can be identified during the uptrend. It is one candle pattern in which the colour has no importance. What is crucial though, is that the candle’s body is small. There can be a short upper shadow or no shadow at all. And the lower wick is quite long. This is the hanging man formation.
The appearance of a hanging man reveals that the sellers are taking control over the market and the prices will most probably fall. The buyers are losing strength. Thus, you can use this pattern to open a short position or to manage ongoing long trade.
Remember that the hanging man should always have a long lower wick. It ought to be at least twice as long as the candle’s body.
Trading with the hanging man pattern
When to open a position
You can open a trading position after you receive a confirmation to your transaction. It happens when the price moves below the low of the candle from the hanging man pattern and the downtrend begins. Take a look at the EURJPY chart below.
Setting a stop loss
It is quite common to place a stop loss over the current highs. It means above the high that the hanging man or the preceding candle has created.
Hanging man pattern on local highs in a downtrend
The hanging man should form at a swing high and after a move higher. You do not need, however, to trade against the trend. If you look at the general trend and it is a downtrend, you can still trade along with the trend. Just wait for the price to move higher to the level of resistance. This way you will not only trade along with the trend but at a key level as well, and this gives you a confirmation of the transaction. In the picture below you will see such a situation. A hanging man appeared at a local high during the downtrend.
The hanging man pattern used for trade management
The hanging man pattern, as I have already mentioned, can be also used to manage an ongoing long trade. When you have opened a long position and you have just spotted the hanging man, you have two options. You can either exit the trade at this point or tighten your stop loss.
Comparison of a hanging man and a hammer patterns
The hanging man and the hammer patterns look quite similar to each other at the first sight. Therefore it is important you are familiar with both and you are able to distinguish them.
The similarity lies in the shape of the candle. They both own small bodies and a long wick pointing downwards.
The difference exists in the place where they form on the price chart.
The formation which I describe today, the hanging man, develops at the top of the uptrend. It gives information about possible trend reversal.
The hammer can be found during the downtrend. Its appearance signifies that the price will probably rise.
The hanging man pattern is very popular because it can be utilised in any market and with any time frame. However, it might be a good idea to introduce additional analysis such as trendlines, support/resistance levels or Fibonacci retracement areas.
The hanging man is a reversal pattern that develops during the upward movement. You can open short trades with it or you can manage your current long positions.
Olymp Trade has a free demo account on its offer. You can practise identifying the hanging man on the price chart there. You will invest virtual cash so there is no risk of losing your own money while training. After some time you should be ready to move to the live account and try the hanging man strategy in a real environment.
Please share any comments you might have regarding the hanging man pattern in the comments section down below.
Wish you high earning!
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