The most important thing is to observe the hanging man candle formation relative to the long-term trend. The best way to confirm this process is by analyzing multiple time frames. Start by looking at the market in a longer time frame, such as daily and weekly, to identify the longer-term trend. Then use a smaller time frame (4 or 2 hours) to analyze the ideal entry point for your position.
First step: identify the long-term trend
Look at the chart on a longer time frame (perhaps the daily) to get a general idea of the direction the market is taking. It would be foolish to open a position against the longer-term trend.
Step two: find the ideal entry point
Using a shorter time frame, identify the ideal entry point. The hanging man candle formation provides a signal for a sell position (go short).
Third step: make use of other technical indicators to reinforce the conviction of the operation.
Does the RSI (Relative Strength Index) confirm that the market has turned and is now in a downtrend? Has the line of the 20-period moving average crossed below the 50? Does the hanging man candle appear near the top of the short-term uptrend? Is there a relevant Fibonacci retracement level nearby?
Step four: open a position
Look for an entry point at the bottom of the hanging man candle. If your bearish market forecast is correct, you will see a downward action by part of the price represented in the next candle and you will be eligible to open a short position.
Step Five: Risk Management
Make sure not to open your position with high levels of leverage. Consider how much money you are willing to risk at any given time and stick to your established limit. At https://finmaxbo.com/en/strategy/498-trading-hammer-and-hanging-man.html, we recommend risking less than 5% of your capital on all your open positions. Also, be sure to place your stop-loss level above the highest point of the hanging man candle formation.
Step six: when to close your position?
When opening a trade, it is always best to have at least a 1: 2 risk/reward ratio, which means you are risking half of what you are looking to win. This means that the distance from your entry point to your profit level should be twice the distance from your open point to your stop-loss level. By applying this simple technique, you will ensure that even if only half of your trades are correct, you will remain in positive territory in terms of your trading account. You can learn more about these strategies with our guide on the characteristics of successful traders.
With a shorter 4-hour chart (below), you will be better prepared to spot the ideal opportunity to enter the market with a short position.
In the chart above, it can be seen that the 1.4000 support level, after being invalidated, turns into technical resistance. The hanging man candle appears near the top of the short-term uptrend, just below the aforementioned resistance. Given this scenario, we will be looking for a possible downward reversal in the market. Eventually, the price falls below the low of the hanging man candle and provides a short entry signal. In this operation, the stop loss can be placed above the resistance level (1.4000) to fulfill the purposes of risk management in case the market moves against you.
Sell signal confirmation
The bear market in the long term
Hanging man candle appears near the high of the short-term uptrend
Hanging Man Candle Appears Near Relevant Support / Resistance Level
Trailing candles extend bearish movements (lower highs and lows)