Contents:After an uptrend reached a peak and buyers of call options are getting exhausted in terms of momentum, a hanging man candlestick might signal the trend reversal. The formation itself is not a trading signal as it requires an additional confirmation by the next candlestick. This candlestick acts as a preliminary bearish reversal pattern only in a context of the previous upside swing of the price action. The strength of the previous uptrend does not matter, even a few green candles can appear on a price chart before the reversal.
The main condition for the hanging man candle is that the upper shadow has to be at least twice larger than the small body. The lower shadow is small or absent.
The formation belongs to the family of single Japanese candlestick patterns. The main idea of the graphical analysis is based on candles feature to describe the full price action within the chosen period. So instead of opening additional charts on shorter timeframes, binary options traders can make conclusions about what happened at a first glance. If the context is correct, the hanging man can be a useful tool to warn traders that something is wrong with the recent trend and a bearish reversal is possible.
What is a hanging man candlestick?
Hanging man must have a small body, large lower shadow and no or small upper shadow. The formation has a shape of a letter “T” and it describes a price action when buyers of call options for the underlying asset start to lose control. A sharp sell-off begins the trading session within the given period, but the bulls reverse the price action and close the period near the open price.
Here is an example of how the hanging man pattern looks like on a price chart:
The following bar after the hanging man candle is crucial for the analysis. The essential condition is that the next candle must be bearish, otherwise, the signal must be ignored. The best-case scenario suggests that the next candle closed below the lowest rate of the hanging man, or at least lower than the previous close. In this case, the sequence of higher highs and higher lows, - which is the main requirement for the uptrend, - is breached, and the put-option buyers should take the market under control.
If the open and close rates are equal, then the pattern is called the hanging man doji. Doji stars are the most widely used formations to monitor reversals of the price among Japanese candlestick patterns. Binary options traders can take advantage of the technical analysis based on several typical formations, and here is how.
How to Use a Hanging Man Candlestick?
The hanging man candle is used as a preliminary signal to start watching the price action in the scope of an upcoming shift of the technical sentiment. If the previous uptrend’s momentum was exhausted and call-option buyers could not continue pushing the price of the underlying asset higher, then the bears use this chance to move the market price lower.
Two typical applications exist for the hanging man formation in binary options trading. The first one is based on buying a few put options with the same expiry as the chart analysis with the condition that the pattern was confirmed. The second trading method is based on the analysis made on a larger timeframe but the deals are opened with shorter expiries. In this case, multiple entries are possible in the same direction. An additional condition is that the trading process has to be shifted to active hours of the intraday trading session, while a separate technical analysis on the shorter timeframe would be an advantage.
Here is the list of conditions to start buying call options according to the trading strategy based on hanging man candlestick:
- An uptrend has to be noticed with at least a few candlesticks in the green and the sequence of higher highs and higher lows;
- If the hanging man appears on the price chart after an uptrend, traders should get ready to start the trading cycle and watch the next candle;
- If the following candle closes in the red and/or below the hanging man’s close, then traders should start buying put options on the next candle open;
- Traders should continue the cycle of buying put options if the price action goes in the right direction and the sequence of lower lows and lower highs are in place;
- Traders should stop the trading cycle if one of the following bars closes above the highest value of the hanging man candle.
There is also a method of technical analysis based on several combinations of Japanese candlestick patterns. For example, the strength of the trading signal could be much higher if the hanging man appeared on the price chart together with a Doji-star or bearish engulfing pattern. Gaps in charts are also powerful in terms of enlarging the effectiveness of the trading strategy in binary options.
Hanging man candlestick patterns are quite rare as most of the upside swings are getting exhausted after a candle with long upper shadow. The difference is just in the sequence of shifts in the price action, while the scenario is the same. On the other hand, patterns are getting stronger if the trading signal comes in line with additional technical indicators.
The difference between the Hanging man and Hammer candlesticks
Every candle with a long shadow signals a shift in trading conditions. It does not necessarily mean a reversal but it points to the fact that the previous price action is losing momentum. Although the hanging man and hammer candlestick look identical, the difference is in the context. The hammer candle is a preliminary signal to monitor the possible reversal of the downtrend, which used to be in place on the price chart before the pattern occurred. The hanging man pattern is a bearish reversal formation that might happen after an uptrend.
If you like this strategy, you might also be interested in this Triangle Chart Patterns
Example of profit trades using
The four-hourly chart below shows that the GBP/CHF cross-rate was in an uptrend as four consecutive green bars formed the sequence of higher highs and higher lows. However, the hanging man pattern occurred, even though it was green as well. The pattern caught the attention of a binary options trader and he watched the next candle’s close rate carefully to whether to confirm or deny the signal. After the signal was confirmed, the traders started the trading cycle of buying put options that brought him a decent profit, according to the further price action.
Below is the same chart with a technical indicator added. Stochastic RSI is a sensitive oscillator reflecting changes in the market’s sentiment and showing overbought and oversold levels. As the screenshot shows, additional confirmation of the trading signal came in from the indicator. The lines crossed each other and bounced off the overbought territory, which is a strong condition to start buying put options.
The hanging man is the candlestick pattern that points to a possible bearish reversal of the previous uptrend. The formation requires additional confirmation of the trading signal by the following candle because this is a single-candle pattern. Sometimes, market conditions are different, therefore, every reversal pattern has to be considered in the context, while a secondary technical analysis is always a plus. The trading strategy is flexible in terms of underlying assets and timeframes, and binary options traders can take advantage of opening deals on shorter time frames after the signal received on a longer chart.