Introduction:
Candlestick patterns are one of the most useful tools for stock market traders. They help them speculate short-term price movements and make informed trading decisions. Originally developed in Japan in the eighteenth century, they comprise one or more candles with distinct bodies, wicks or shadows, and colours.
The candle's body represents opening and closing prices during a specific trading session, the upper and lower wicks represent the highest and lowest price points, respectively, and the colour represents the direction the stock has moved.
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In this article, you will learn about one of the most significant candlestick patterns – the hanging man pattern. This pattern, resembling the shape of a hanging man, can provide valuable insights into potential market reversals if identified correctly. As a trader, you not only need to know how to identify the hanging man candlestick pattern but must also learn its significance and appropriate trading strategies. Keep reading.
What is a hanging man candlestick pattern?
The hanging man candlestick pattern comprises a single candle with a small real body, a long lower shadow, and negligible upper shadow. Visually, it resembles a candle with a small body at the top of a long lower shadow and a very short upper shadow, giving it the appearance of a hanging man. The small body resembles a man’s face, the long lower wick resembles the body and legs, and the short upper wick resembles the head.
A hanging man typically appears after a prolonged uptrend and signals a potential reversal to a downtrend. Below are the components of this pattern:
The real body of the candle is relatively small, signifying that the opening and closing prices of the stock during a trading session are close to each other. This happened because the stock suffered high volatility during the trading session but closed near the opening price. It suggests indecision between buyers and sellers. The colour of the body (red or green) is not as significant as the overall structure.
The most distinctive feature of a hanging man candlestick is its long lower shadow, more than twice the size of the body. The long lower shadow reflects a significant distance between the lowest price during the trading session and the opening or closing price. It happens when the selling forces try to dominate the stock and push its prices down but buyers give a tough fight.
A very short upper shadow is another distinct feature of the hanging man pattern. In some cases, the upper shadow is nonexistent. It indicates that the opening and closing prices are close to the highest price point during the trading session. It happens when the stock moves only downward before recovering and closing near the opening price.
Trading strategies for hanging man pattern
The formation of the hanging man pattern indicates a potential trend reversal from bullish to bearish, especially when it appears after a prolonged uptrend. You can interpret this pattern as a sign that the bulls are losing control over the stock and the bears are gaining strength. However, it’s crucial to consider other technical indicators and price action context before making your trading decisions.
Below are a few trading strategies you can consider for hanging man pattern:
- Expect a pullback in prices
The hanging man is a bearish candlestick pattern indicating a trend reversal from uptrend to downtrend. You can expect the stock price to fall or at least go through a significant pullback. Hence, the appearance of a hanging man during an uptrend is a sign that you can enter a new short position or exit your existing long position.
- Confirmation with other technical indicators
You must confirm your trading move with other technical indicators. For example, an increase in volume during the pattern formation can lend credibility to the possibility of a trend reversal. Additionally, you can wait for more bearish signals before entering a trade.
You must use appropriate risk management strategies to mitigate high losses. Placing stop-loss orders and being aware of false signals is crucial.
To conclude
You can use the hanging man pattern to enter a short position or exit a long position. The idea is that despite opening higher, sellers pushed the stock down before the buyers managed to bring it up. However, remember to use stop loss and risk-management strategies.
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