Trading the hanging man formation
Let’s look at another example.
At the point marked ‘1
’, the price action trades sideways before there is a bullish push higher to break out of the trading range. At one point, the price action forms the hanging man, which is then confirmed by the next candle, and the reversal is set in motion. Ultimately, the price action moves below the previous swing low to create a new short term low.
The situation at the point marked ‘2’ is different since there is a clean push higher before the hanging man is created.
In this case, the reversal doesn’t occur immediately after the hanging man is formed, but the price action moves from a bullish trend to a consolidation phase. Ultimately, the price moves to the downside to print even lower levels than during the first pullback.
In both these situations, a hanging man played a part in the correction process. These two examples show the essence of this pattern as it only generates a signal of a potential reversal and other indicators are needed to build a more complete picture.
A stop-loss should be placed above the most recent high as the new high would imply a continuation of the same trend. Take profit orders depend on your trading style and here it is also advised to use other indicators to identify levels of support.
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