Hanging Man Candlestick Pattern
The hanging man is a very popular, but often misused, candlestick trading signal. In this addition to my price action course, my goal is to show you how to correctly identify and start trading the hanging man candlestick pattern (in the right situations).
This popular candlestick formation is a weak reversal signal, and as a result, most experienced candlestick traders do not use the hanging man alone as an entry signal.
Although the hanging man candle, when properly traded, is not typically used as an entry signal, it can be a great heads-up indicator. Especially when combined with a good system for entry triggers, this candlestick signal can be a powerful tool to have in your trading arsenal.
Note: I do not recommend pure candlestick trading with the hanging man, at least not as an entry signal, unless it’s combined with a reliable trading system that has proven to be profitable on its own.
What is a Hanging Man Candlestick Pattern?
The hanging man is a weak bearish reversal signal. This candlestick looks like the hammer candlestick signal, only it appears at the top of a trend, or strong bullish price movement. Like the hammer candlestick, the hanging man should have a long lower wick/shadow (at least 2x the size of the real body), as well as little to no upper wick/shadow.
The real body of the hanging man signal can be bullish or bearish (see the image above). For obvious reasons, this bearish reversal signal is considered to be slightly more bearish if the real body is also bearish.
As I mentioned before, this candlestick formation is only considered to be a true hanging man candlestick signal when it appears after an uptrend. The context in which you take any candlestick signal is of utmost importance. Never trade candlestick signals from within price consolidation (flat or sideways markets).
The psychology of this signal is that, even thought the bulls are still in control of the market, the market has shown an ability to move lower (long lower wick/shadow). This can make the bulls a little nervous, and some may start taking profits while they’re ahead.
Trading the Hanging Man Candlestick Pattern
In the image below, you will see a series of hanging man candlestick patterns. In both cases, these formations happened during an uptrend, and in both cases they signaled an upcoming bearish price movement. As you can see, the second set of hanging man candlesticks signaled a full reversal in the trend.
In either case, these candlestick signals would have been a great place to take profits on a bullish trade that you might have been in, which is how most successful candlestick traders use this particular price action signal.
Example: You enter a bullish trade, riding the trend up as far as you can. When you see the first hanging man (in the example above), you close half of your position. Upon seeing the following bearish confirmation candle, you realize that you were right to be suspicious of the trend continuing. However, price doesn’t break the low of the confirmation candle, so you keep the other half of your position in play for now. Upon seeing the second set of hanging man signals, you close your remaining position.
As demonstrated in the example above, you would have been wise to utilize this candlestick formation as an exit signal. Of course, if you had closed your entire position after the appearance of the first hanging man, your trade would have been almost as successful as the one described in the example, without the extra risk.
In the image above, you can see another hanging man candlestick signal, with dashed lines showing the proper entry and stop loss placement. Notice that the entry trigger is (1 pip) below the bearish confirmation candle – not the hanging man itself. The stop loss is placed (1 pip) above the highest high in the bullish cycle (current uptrend swing).
As I mentioned earlier, I do not recommend pure price action trading with the hanging man as an entry signal. That being said, the technique above is the correct way to trade this signal as a entry trigger if you choose to.
Also keep in mind that the hanging man can be a very high probability entry trigger when combined with a good trading system. The Top Dog Trading system, for instance, teaches ways to measure other energies in the market (cycle, momentum, support/resistance, etc.). When you know what the other energies in the market are doing, it’s much easier to qualify high probability candlestick signals.
In the image above, you can see another great example of how the hanging man candlestick pattern can be used as an exit signal. There are some other indications that the bulls are running out of steam in this example as well. Let’s look at them altogether to get a picture of how we could have anticipated the bearish fall in price that followed:
1. The second large candlestick in the strong bullish move that preceded our hanging man candlestick pattern made a huge move upward, but the market rejected price at those levels (see the image above). This candlestick occurred to early in the trend to be considered a shooting star, but the long upper wick/shadow is still relevant.
2. Price retested those levels that the market had previously rejected (as it often does), and made some headway. However, while retesting those price levels, a hanging man candlestick signal appeared. This is considered to be a bearish signal, especially considering that it appeared within an area of such obvious rejection of price by the market.
3. The following candlestick is bearish, which is (depending on its relative size) a confirmation of the bearish sentiment of the market at the time. This means that the bulls are probably getting nervous, and taking profits on their open positions. This causes supply to go up, and price to go down.
If you would have taken this particular hanging man candlestick pattern as an entry signal, placing your stop loss above the hanging man itself, you would have gotten a nice risk to reward trade. However, the correct place to put your stop loss, in this scenario, would have been above the large upper wick/shadow that preceded the hanging man signal, because that is the highest high in that particular bullish movement.
Note: Putting your stop loss in the correct place on this particular trade would have yielded an unfavorable risk to reward scenario. So what do you do? You would simply stay out of the market.
Successful trading means staying out of the market until conditions are perfect. Even then you will lose trades, so don’t just trade for the sake of trading.
Keep in mind that candlestick trading is great for predicting short term market direction changes, but there is never a guarantee on how long any particular market direction will last. This is especially true with the hanging man, or any of the weak candlestick reversal signals.
The context in which any candlestick signal is traded is very important. A true hanging man candlestick pattern can only appear after an uptrend in price. Never trade the hanging man, or any other candlestick signal, during periods of price consolidation (flat or sideways markets).
As with any trading technique that you choose to try, wise money management skills will go a long way toward ensuring your continued success. Take only the best trade setups, use your stop losses, and make sure you are never overleveraged!
The hanging man is a very popular, but often misused, price action signal. Trading the hanging man candlestick pattern can be very fun and rewarding, if you know how to trade it correctly. As always, be sure to and demo trade this technique, until you have a firm grasp on it, before risking any of your hard earned money.
#1 Hello ! all.I found yesterday some thing intresthing and today with this system i did make couple profitable trades.I don't know or this system was published befor,but i think we can test this system all together.Manual i don't have.You just intall all indicators to indicators folder and drop all to any currency chart and you can see then very usefull tool for trading...
I have spent a considerable time studying your strategies and i would like to share with everyone what i have taken and now apply to my trading. Any currency pair can be traded Indicators: 5,10,20 EMAs - RSI - MACD Time frame: I use 15min charts (I find bigger time frames to slow and bigger stops) Entry rules: On an down trend wait for a higher low.Find a 1-2-3 setupEnter long just below 2 with stops just under 3RSI MUST be above 50MACD must be or just about to cross over. Exit rules: Once you have reached to same distance as risked close out.
You by now, have seen and read many two(2) moving average crossover forex trading strategies. But this one here is bit different: you need to have 3 moving averages. Why tripple Moving Avearge? Well… The added Moving Average helps avoid false signals commonly encountered in the standard MA crossover. Forex Indicators Required: 10 EMA (fast) 25 EMA (medium) 50 EMA (slow) Timeframes: 15 Minutes and Larger Currency Pairs: Any HOW TO TRADE THE TRIPPLE MOVING AVERAGE FOREX CROSSOVER FOREX TRADING STRATEGY Buying Rules: When the 10 ema crosses 25EMA, and then also crosses the 50 EMA, then buy. Place your stop loss a few pips below the nearest swing low point. Use Previous Swing High Points As your take profit target level. Exit when the fast EMA touches the medium EMA or Exit when the fast EMA crosses over the medium EMA. You have to wait till the current bar/candlestick has closed before taking the exit signal. Selling Rules: When the 10 ema crosses 25EMA, and then also crosses the 50 EMA to the downside, then sell. Place your stop loss a few pips above the nearest swing high point. Use Previous Swing Low Point As your take profit target level. OTHER MOVING AVERAGE COMBINATION OPTIONS Fast Moving Average Settings for shorter time frames. (15 min – 1 hour) 10 EMA, 25 EMA, & 50 EMA 4 EMA, 9 EMA, & 18 EMA Slow Moving Average Settings for longer time frames (1 hour – 1 week) 17 SMA, 14 SMA, & 21 SMA 5 SMA, 10 SMA, & 20 SMA 4 SMA, 10 SMA, & 50 SMA SIMPLE Vs EXPONENTIAL MOVING AVERAGE Simple Moving Averages (SMA) have more lag. SMAs are more suited for trading on longer time frames (over 1 hour). These can also be used to help identify support and resistance areas, especially the 200 SMA. Exponential Moving Averages (EMA) have less lag. These are more suited for trading on shorter time frames (under 1 hour). ADVANTAGES OF THE TRIPPLE MOVING AVERAGE FOREX TRADING STRATEGY Simple and easy to follow. Easy to automate. It is A Very profitable forex strategy in trending markets. DISADVANTAGES OF THE TRIPPLE MOVING AVERAGE CROSSOVER FOREX TRADING STRATEGY Doesn’t work well in ranging markets. Can lead to numerous false signals. So You have to Avoid using this strategy during ranging markets. Requires monitoring after every new bar has closed. Remember to wait till the current bar has closed before taking any action. Signals can change frequently if you are watching the graph tick by tick.