Trading the Hanging Man with Pivot Points

Using Pivot Points in conjunction with the Hanging Man candlestick pattern can provide a robust strategy for identifying potential bearish reversals. This approach focuses on leveraging the automatic support and resistance levels that Pivot Points create.

Step-by-Step Guide

1. Activate the Pivot Points Indicator

Set Up Your Chart: Begin by activating the Pivot Points indicator on your trading platform:

• Choose Daily, Weekly, or Monthly Pivot Points based on your trading style. Daily Pivot Points are particularly popular for day trading.

2. Identify Resistance Levels

Locate Resistance Points: Check which Pivot Points are positioned above the current price:

• These levels will act as potential resistance points where price rejections may occur.

3. Confirm the Downtrend

Assess the Trend: Ideally, you want the price to be in a downtrend, although this is not strictly necessary:

• Look for lower highs and lower lows to confirm the bearish trend.

4. Wait for an Upward Move to a Pivot Point Level

Monitor Price Action: As the price moves, wait for it to retrace upwards towards a Pivot Point level:

This retracement provides the opportunity to identify potential resistance.

5. Look for the Hanging Man Pattern

Identify the Pattern: When the price reaches a Pivot Point level, watch for the formation of a Hanging Man candlestick:

• Ensure that the candle has a small body, a long lower wick, and minimal or no upper wick, indicating rejection at the resistance level.

6. Enter the Trade

Short Position Entry: Once the Hanging Man pattern appears at the Pivot Point level, prepare to enter your trade:

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• Trigger: Place a sell order when the price breaks below the low of the Hanging Man candle, signaling a potential continuation of the downtrend.

7. Set Your Stop Loss

Manage Your Risk: Protecting your capital is essential:

• Stop Loss Placement: Set your stop loss just above the high of the Hanging Man candle. This provides a buffer against unexpected price movements.

8. Determine Your Take Profit Levels

Profit Target: Before entering the trade, establish your exit strategy:

• Target Levels: Set your take profit at previous support levels or based on a risk-reward ratio that aligns with your trading plan.

9. Expect a Move to the Downside

Monitor Price Action: After entering the trade, keep a close eye on price movements:

• Look for subsequent bearish candles confirming the downtrend.
• Adjust your stop loss to lock in profits as the market moves in your favor.

Trading the Hanging Man pattern with Pivot Points can be an effective strategy for identifying potential bearish reversals at key resistance levels. By following these steps, you can enhance your trading effectiveness and manage risk appropriately.