Trading the Hanging Man with RSI Divergences

Using RSI divergences in conjunction with the Hanging Man candlestick pattern can provide a powerful strategy for identifying potential bearish reversals. This approach focuses on spotting divergences between price action and the RSI indicator during an uptrend.

Step-by-Step Guide

1. Identify the Uptrend

Confirm the Trend: Start by ensuring that the market is in an uptrend. You can do this by:

• Observing the price making higher highs and higher lows.
• Using a moving average to confirm the bullish trend.

2. Mark the Price Highs

Track Price Movements: As the price moves higher, mark the significant highs that the price reaches after each upward leg. This helps to visualize the overall trend.

3. Compare Price Highs with the RSI Indicator

Analyze the RSI: Open the RSI indicator on your chart and compare it with the price highs:

• Look for instances where the price is making higher highs.
• Simultaneously, check if the RSI is making lower highs during these price increases.

4. Identify Bearish Divergence

Recognize the Divergence: If you notice that the price is making higher highs while the RSI is making lower highs, you have identified a bearish divergence:

This signals potential weakness in the uptrend and suggests a possible reversal.Trade Now

5. Wait for the Hanging Man Pattern

Look for the Hanging Man: Once you have identified the bearish divergence, wait for a Hanging Man candlestick pattern to form at the higher price high:

• Ensure that the candle has a small body, a long lower wick, and minimal or no upper wick.

6. Enter the Trade

Short Position Entry: When the Hanging Man pattern appears, prepare to enter your trade:

• Trigger: Place a sell order when the price breaks below the low of the Hanging Man candle. This confirms the bearish reversal.

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 safety net against unexpected price movements.

8. Determine Your Take Profit Levels

Profit Target: Before entering the trade, define 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 an 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 alongside RSI divergences can be an effective strategy for identifying potential bearish reversals. By following these steps, you can enhance your trading effectiveness and manage risk appropriately.