Reverse Hanged Man is a pattern identified on a chart of a financial instrument's price movements. It is a single candlestick pattern that has three parts, including the long lower shadow, small real body, and long upper shadow. The pattern is categorized as a reversal pattern and is often found at the bottom of a downtrend or at the top of an uptrend. The pattern indicates a possible change in the trend and suggests that the price of the security will continue in the opposite direction.
How the Reverse Hanged Man is Formed
The Reverse Hanged Man candlestick pattern is formed when the opening price of the security is below the close of the previous period. The security opens at a low price but then moves higher when buyers enter the market. The buyers push the price of the security up, above the closing price of the previous period. However, the buyers are unable to maintain the gains, and the sellers enter the market and push the security down. The security then closes near its opening price, forming the small real body. The long lower shadow is created when the buyers enter the market, pushing the security up, while the long upper shadow is created when the sellers enter and push the security down.
Reversal Indication
The Reverse Hanged Man pattern is considered a bearish reversal pattern because it indicates that the price of the security will continue in a downward direction. This is because the buyers, who initially pushed the price up and created the long lower shadow, were unable to maintain the gains and were forced to sell. The sellers then pushed the price down, creating the long upper shadow. The small real body indicates that the bears and bulls were in a tug-of-war and that the bears eventually won.
Trading the Reverse Hanged Man
If the Reverse Hanged Man pattern is identified on a chart, traders may look to take a short position in the security. Traders should wait for the security to break below the low of the pattern before entering a trade. Traders may also look to place a stop-loss order above the high of the candle. Traders should also look for confirmation before entering a trade, such as a breakdown of support levels or a bearish candlestick pattern. Traders should also use other technical indicators, such as moving averages, to confirm the trend.
Risk Management
Risk management is an important part of trading the Reverse Hanged Man pattern. Traders should use a stop-loss order to protect against large losses. Traders should also use a position size that is in line with their risk tolerance. Traders should also use other technical indicators to confirm the trend before entering a trade.
Trading Psychology
Traders should also be aware of trading psychology when trading the Reverse Hanged Man pattern. Traders may be tempted to enter a trade too early, before the security has broken below the low of the pattern. Traders should practice patience and wait for the security to break below the low before entering a trade. Traders should also be aware of their risk tolerance levels and not overextend themselves.
Conclusion
The Reverse Hanged Man is a bearish reversal pattern that can be identified on a chart of a financial instrument's price movements. The pattern is formed when the opening price of the security is below the close of the previous period and the buyers are unable to maintain the gains. The pattern indicates that the security will continue in a downward direction and suggests that traders may look to take a short position. Traders should use risk management techniques and be aware of trading psychology when trading the pattern.