Detecting a change in trend(reversals) it can be very profitable. This changes in trend can allow you to protect your profits by closing the position or opening a new position in the opposite direction to the current trend, going long or going short. The trend changes occur in all time units from minutes to days and weeks.
A change in a small unit of time does not necessarily mean that there is a change in the higher timeframe.
The Japanese candlesticks are very useful to spot these changes in the trend or weakness. The dojis or the hanging man are candlesticks easy to identify and easy to trade once we know how they work and how the trend should behave after they appear.
What is a hanging man candlestick?
The hanging man Japanese candlestick is a bearish reversal pattern. It can signal a top in the market or a resistance level. The hanging man candlestick pattern signals that the selling pressure is starting to build and the uptrend it’s weakening. The long lower shadow indicates that the sellers were able to carry the price down during the session. Despite the fact that buyers regained tone and price up at the end of the session, the emergence of this selling pressure after a rally is a red flag.
How to identify a hanging man candlestick pattern?
– The hanging man candlestick, has a small-bodied candle, with a long lower wick and a short or non-existent upper wick
– It appears at the top of an uptrend
– The signal is strongest when the candle develops near important resistance levels or new highs
– The candle is characterized by a small body which is above the trend. The body must be bearish (red body)
– It has a long lower shadow that is at least twice the size of the body
What a hanging man indicates?
– Trend reversal (bearish reversal)
-Higher price rejection (often at a key level)
How to trade a hanging man candlestick?
If the hanging man candle immediately generates a new downtrend, traders can enter the market at the beginning of it and take advantage of the full move, it’s easy to Identify on a price chart.
– Wait for confirmation, see how the next candle develops and see if a downtrend it’s starting.
– Put the Stop-loss above the hanging man or resistance levels.
– Sometimes there is a retest at the resistance created by the hanging man. A patient trader can place orders at the resistance levels to catch a better price.
– Remember the higher the time frame the higher the probabilities of the pattern to work.
To sum up
Ideally, the lower shadow of the bearish hanging man pattern should be two or three times the height of the body of the candle, although valid hanging man patterns can be found with lower shadows that do not reach this length.