The "hanging man pattern" is a single-candle configuration that appears at the peak of an upward trend. Traders favor this pattern because it is considered a reliable indicator of potential shifts in trend direction.
The hanging man is recognized as a bearish candlestick pattern, signaling that bullish momentum may be waning and the market might soon reverse. It also suggests a significant sell-off occurred that day, which buyers could not overcome.
The "Hanging Man" candlestick pattern, a bearish reversal indicator in technical analysis, suggests a potential shift from an uptrend to a downtrend. This pattern features a small true body, a long lower shadow, and little to no upper shadow, typically forming near the peak of an uptrend.
It indicates a dramatic price drop during the day, with a close near the opening price, resulting in a small true body that resembles a hanging man, highlighted by the long lower shadow. The color of the body does not matter, it can be either red or green (bearish or bullish). An illustration of the pattern formation is shown below.
The appearance of the Hanging Man may not immediately signal the beginning of a reversal. Instead, it indicates that momentum might be waning, with price action preparing for a potential trend shift.
Traders use the Hanging Man pattern on the charts patterns to identify possible changes in market sentiment and guide their trading decisions. When this pattern emerges during a prolonged upswing, it suggests that bearish forces are gaining control.and buying pressure is decreasing.
Follow these steps to trade Hanging Man pattern:
Identify the pattern: To gauge market direction, examine the chart on a longer timeframe, such as a daily chart. Avoid trading against the prevailing long-term trend.
Confirm the pattern: Use a shorter timeframe chart (e.g., 4 hours) to pinpoint the optimal entry point. A signal for a short trade is signaled by the formation of a hanging man candlestick.
Execute your trade: Identify an entry point near the low of the hanging man candlestick. If your bearish market assessment proves correct, anticipate a subsequent price decline, validating your decision to initiate the short position.
Manage risk: Align your trade size with your risk management strategy. Maintain discipline by adhering to the predetermined percentage of your total account risk per trade. Implement a stop loss at the highest point of the hanging man candle formation to mitigate potential losses.
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