Considered a reliable tool among investors, a hanging man candlestick pattern is used to predict the trend direction changes. The hanging-man candlestick pattern display highs, lows, opening and closing prices of securities. Some traders use the pattern to decide whether or not they should enter or exit trades.
A hanging man candlestick pattern is the single pattern which is formed at the end of an uptrend. It is a bearish reversal pattern indicating an end to an uptrend.
Though a hanging man pattern in the candlestick represents a potential reversal of the uptrend, selling an asset based on the hanging man pattern will be a risky proposition. Many analysts and investors believe that it is evidence of the market sentiments going down and that the uptrend is no longer strong.
A hanging man is considered a bearish candlestick pattern which issues the warning that the market is likely to reverse soon and the bull has started losing its momentum. However, the reversal might not start as soon as the hanging man pattern is formed. In contrast, it generates a message that the current market momentum is in the closing stage, and the price action is preparing for a potential change in the trend direction.
The hanging man candle is formed when the open, high, and close for security are similar while the downside shadow is long. Ideally, this shadow is at least twice the length of the body of the candle.
he Hanging Man Explanation
The hanging man pattern in the candlestick chart is formed when two main criteria are fulfilled:
- The security has been in a positive or uptrend for a while
- The hanging man pattern in the candle has a small real body and a long lower shadow.
When these two criteria a met and a hanging man is formed in an uptrend, it indicates that the buyers have lost their strength. So far, the demand for the asset was pushing the stock price higher. However, with the hanging man pattern, there is an indication of significant selling.
Though the buyers of the security under analysis manage to bring the price closer to the open price, the initial sell-off indicates that a larger group of investors think that the price of the security has been peaked.
Investors who believe in the hanging man candle pattern find an opportunity to sell the existing long position or even go short anticipating a decline in prices. The wick of the hanging man pattern is created by an extensive selling pressure, although the bulls forced a close near the session’s high.
Red & Green Hanging Man
A red, bearish hanging man candlestick is formed when the high and open are the same. This pattern is considered to be a strong bearish sign.
In contrast, a green hanging man candlestick is formed when the high and close are the same. Though the green hanging man candlestick pattern also indicates a bearish trend, it is considered to be less bearish because the day is eventually closed with gains.
How to Trade on the Hanging Man Candlestick?
Investors while trading look for the specific features in hanging man patterns and take advantage of the prevailing market sentiments. It is important for the investors to check whether it is at least twice as long as the body.
A longer lower shadow indicates that the sellers entered the market aggressively when the formation in the candle took place. More meaning and depth is added to the candlestick with a long lower shadow in the hanging man candlestick pattern.
If we talk about how to trade in the hanging man candlestick, here is how you can do so:
- Those investors who precede a bearish trading period, indicate a better than average trading volume and have a lower closing price are better indicators of a change in the market sentiment.
- The hanging man’s evidence in the candlestick chart should be looked for a longer period in the trading chart, for instance, weekly or daily before looking for a good entry point in a short time frame.
- A hanging man patter should be taken as a warning and not a sole indicator of a declining or weakening market.
- Stop-loss should be placed above the most recent high. This is because a new high would indicate that the same trend will be carried forward.
Disadvantages of a Hanging Man Pattern
Some of the disadvantages of a hanging man candlestick pattern are as follows:
- As mentioned, price tags are missing in a hanging man candlestick pattern. Hence, it fails to help investors with price tags.
- The trader should remain within the trade for a considerable time period so that the trend reversal is sustained and ejected quickly when the asset price picks up.
- It is not a very reliable technical indicator and is always used in conjunction with other technical indicators.
- Hanging man pattern should always be backed by supporting evidence such as a longer wick or better volumes of the next trading period after the pattern appears.
- It is quite possible for a trader to get confused between a hanging man pattern, a shooting star pattern, and a hammer pattern of the candlestick charts and hence he needs to be cautious.
Difference between Hanging Man, Shooting Star and Hammer Pattern
Just like a Shooting Star Pattern, the Hanging Man pattern also appears near the top of an uptrend. The difference between the two is that the hanging man pattern’s small real body is near the top of the entire candlestick chart and is accompanied by a long lower shadow.
On the other hand, a Shooting Star Pattern has a small real body near the bottom of the candlestick and is accompanied by a lower upper shadow. It can also be said that a shooting star is a flipped hanging man. However, in both cases, the length of the shadow should be at least twice the height of the real body. Both charts indicate a lower shift in the prices.
When compared to a hammer pattern of the candlestick, both the patterns represent a trend reversal. However, the difference is between the natures of the trend in which both patterns appear. If the pattern appears in an upward trend indicating a bearish reversal, it is called a hanging man pattern. If it indicates a downward trend indicating a bullish reversal, it is a hammer pattern. Apart from this, both the patterns and their components are identical.
Conclusion
A hanging man pattern is generally bearish, which is either dark or red. The hanging man’s lower wick should be equal to or double the length of the real body. It is a strong pattern if the volume of trading is a better indicator of the trend reversal. A hanging man pattern is often considered to be a reliable candlestick pattern. However, a hanging man pattern should be backed with evidence supporting the entry and exit point.