The Hanging Man candlestick pattern is one of the 12 major reversals. Here is a hanging man pattern – Review. The probability of accurately entering the market with this signal becomes extremely high.
Hanging man candlestick pattern consists of three separate candlesticks. The candlestick can be either bearish or bullish.
The first candle is the installation candle. It is a bull candle and it is preferable that it appears at the end of a significant price movement upwards. The second candle is a signal candle. The candlestick looks like a candlestick pattern Hammer, but it appears at the top of the price movement. It consists of a short body and a relatively long lower shadow. The third candle is a confirmation candle. This candlestick is a strong push of the price down. It has a rather long body.
The lower shadow should be at least 2 times larger than the body. The color of the candle body does not matter, although the red body has a stronger bearish connotation. The upper shadow should be small, or better yet absent. The next candlestick should confirm the signal: the candlestick should have a large red body, and it is better to open with the gap down.
The longer the lower shadow is, the higher the turning potential.
The upward gap in the signal candlestick increases the probability of a reversal, provided that the next candlestick after the Hanging is formed by a bearish one. A large volume of trades on a signal candlestick increases the probability of a reversal, although this is not a necessary condition.
Psychology and fundamental factors
After a strong uptrend, the market is bullish. The price opens higher, but begins to move down – sellers come to the market. However, before closing, buyers intervene and push the price back to the upper limit of the trading range, creating a small candlestick body and a long shadow. Looking at the previous candlesticks we can decide that the buyers still control the market. However, the long lower shadow means that the sellers appear. Although the buyers managed to keep the price to close the candlestick, the evidence of sales is obvious. Decrease in the price at the opening of the next candle confirms the increase in sales.
The Hanging candlestick pattern is formed in the upper part of the price movement. Two scenarios are possible here:
This can happen at the end of a long upward trend, which drains the buyers’ stock and attracts sellers at significantly higher prices. At this stage, sellers will be inclined to enter the market with the supply of currency at inflated levels. Sellers have already begun to enter the market on the signal candle, pushing the price down to a level that will shake the confidence of buyers. While the buyers still control the market, having pushed the price back up to the highs. However, some buyers are beginning to leave the market, fixing the profit, on the understanding that the price growth can not continue forever. Thus, the price starts to fall.
Hanging man candlestick pattern can also occur in a downward trend, when the price temporarily bounces back, preferably to the resistance level. This temporary upward movement may be due to profit taking by a part of sellers, appearance of buyers at relatively low prices or just a cyclical decrease in sell orders. Therefore, the price moves up to the resistance level, where sellers are ready to enter the market again, pushing prices down again.
Market entry and stop loss
You can place a Stop Sell order 2-5 pips below the minimum confirmation candlestick or you can enter the market order if you are sure that the price will fall further. In any case, your stop loss should be set 2-5 points above the maximum of the signal candlestick. This is only a rough guide. In volatile markets, you can move the stop loss upwards. Also, for higher timeframes, stop loss should be set higher, for example, for the daily timeframe 5-20 points above the maximum of the signal candlestick.
The more confirmation candlestick you have, the more likely the reversal is. However, if the candlestick is too large, there may be problems with the optimal risk/profit ratio. For example, if a signal and confirmation candlestick together reach 100 points, then your stop loss will be at least 100 points. Therefore, take profit will have to be set at least 150-200 points. If there is a support level within this range, you will have to skip this signal and do not enter the market, no matter how obvious it is.
Candlesticks and candlesticks patterns are the pulse of the market, which determines the price action and moods of market participants, which is the driving force of the price action.
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