Price Action Candlesticks Patterns

Knowledge of current economic events is a fundamental element of effective trading. In the case of currency pairs and indices, the ability to use the calendar is already satisfactory. Nevertheless, to assess market sentiment, it is worth following current events. In the case of instruments such as shares, tracking information from companies is a necessity.

Hanging Man

Hanging Man Formation: Potential Reversal Signal in Downtrend

Introduction: The "Hanging Man" formation is a significant pattern in technical analysis that often signals a potential reversal of the downtrend in the financial market. In this article, we will take a closer look at the "Hanging Man" formation, its structure, and how one can execute trades using this signal.

What does the "Hanging Man" formation look like? The "Hanging Man" formation consists of a single candle, which includes the following elements:

Long Lower Shadow: Characteristic of this formation is a long lower shadow, which is at least twice as long as the candle body.
Small Candle Body: The candle body is usually small and located at the top of the range.
Lack or very short Upper Shadow: The upper shadow is usually absent or very short, indicating that the closing price is close to the session's high.

Key Information about the "Hanging Man" Formation:

The "Hanging Man" formation signals potential weakening of the downtrend and possible takeover by bulls.
It appears at the end of a downward price movement and may be an early warning of a market direction change.
The longer the lower shadow, the stronger the reversal signal.

How to Trade Based on the "Hanging Man" Formation?

Market Context: Before entering a trade based on the "Hanging Man" formation, it is important to assess the market context. This formation is more significant when it appears after a long downtrend or near significant support levels.
Signal Confirmation: It is important to confirm the "Hanging Man" formation with subsequent candles. Other technical analysis tools, such as momentum indicators or price patterns, can provide additional confirmation.
Placing Buy Orders: After the "Hanging Man" formation occurs and is confirmed by subsequent candles, traders may consider placing buy orders at the opening of the next session.
Setting Stop Loss: Stop loss can be placed below the lower shadow of the "Hanging Man" formation to minimize the risk of loss if the reversal signal is incorrect.
Taking Profit: Traders can apply various profit management strategies, such as setting profit targets based on support and resistance levels or monitoring subsequent candles for confirmation of further growth.

Summary: The "Hanging Man" formation is a significant signal of potential reversal of the downtrend in the financial market. However, as always, it is important to consider the market context and confirm the signal with other technical analysis tools before making an investment decision.