After an uptrend reached a peak and buyers of call options are getting exhausted in momentum, a hanging man might signal the trend reversal. Importantly, the formation itself is not a trading signal as it requires additional confirmation by the next candlestick. The 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 is largely irrelevant, as even a few green candles can appear on a price chart before the reversal.
The formation is built on the idea of a Heikin-Ashi candlestick. The main idea of the graphical analysis is based on the candles feature to describe the full price action within the chosen period. 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 hammer candlestick is possible.
The bearish hammer in practice
The 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.
How you can profit from the bearish hammer
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 candle meaning to be taking place 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 must be shifted to active hours of the intraday trading session, while a separate technical analysis on the shorter timeframe would be beneficial.
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