The Hanging Man Candlestick Pattern

Concept and Formation of the Hanging Man Pattern

The Hanging Man candlestick pattern appears on a chart at the end of a strong uptrend, when the uptrend reaches its peak. It warns that buying power is beginning to weaken and that a bearish price reversal is likely.

To distinguish the pattern on the chart, the following must appear:

Upper Wick or Shadow: It must be very small or even non-existent. This confirms that the price did not trade higher than the candle’s body.

Small Candle Body: It must be very small and located near the top of the candle’s range. It represents the difference between the opening and closing prices and suggests that buyers were able to slightly push the price near the opening price during the trading day, forming the small body that resembles a hanging man.

Long Lower Wick or Shadow: Its length must be at least twice the length of the candle’s body. This extension runs from the closing price to the daily low, indicating that sellers began to take control and that significant selling occurred during the trading day, causing the price to fall to such a degree that buyers were unable to push it back up completely before the market closed.

Confirm the pattern using other technical analysis tools, such as:

RSI (Momentum Indicator): Look for a bearish divergence between the price action and the indicator.

Support Levels: Look for a price break below a significant support level under the candle to confirm the start of a bearish reversal.

Color and Pattern Confirmation

Does the color of the Hanging Man matter for confirmation?

The color is not the most important factor in this pattern. The small body and long wick of the candle, along with its appearance at the peak of the uptrend, are the two most crucial factors for pattern confirmation.

Nevertheless, the color can provide additional confirmation. How?

If a bearish (red) candle appears, this provides stronger confirmation of a potential trend reversal, as it means the closing price was lower than the opening price.

If a bullish (green) candle appears, this means the candle closed higher than the opening price, reflecting a weaker reversal signal. However, the pattern remains confirmed due to the candle’s long wick or tail.

Remember: The pattern must always be confirmed using other technical analysis tools and indicators before entering any trade.

Reversal vs. Uptrend

Reversal: A change in the direction of price movement. It occurs when the price action is in an uptrend and begins to move downward. When the reversal appears in the Hanging Man pattern, it indicates that the expected reversal or downtrend will be short-term and may not last long.

Uptrend: Occurs when the price movement is in a continuous upward trend, forming successively higher highs.

The Hanging Man: When, How to Use, and Frequency

The pattern usually forms at the peak of an uptrend, or after a period of uncertainty and volatility on the chart.

As mentioned earlier, this pattern is a bearish warning sign, and its appearance means that buyers (known as Bulls) have started losing control, and sellers (Bears) are beginning to gain control.

When you see it, you have one of two options:

Either exit your long position to lock in profits before the decline begins.

Or you can open a short position to capitalize on a potential bearish reversal.

The frequency of this pattern depends on the market condition and the timeframe you are monitoring (hourly, daily, weekly).

How to Trade the Hanging Man Candlestick Pattern

Find and Confirm the Pattern: Find a candle with a small body and a long lower wick or tail, and ensure the pattern appears at the peak or end of the uptrend.

But wait! Don’t trade based on the candle alone! Make sure to use other technical analysis tools, such as:

Use Volume to ensure that trading volume increased significantly with the appearance of the candle, as this validates the pattern’s signal.

You can also use Moving Averages to confirm that the candle appears at a strong resistance level, implying that the price may have already begun to break the uptrend line.

After Confirmation, you have two options:

If you own the stock (in a long position), exit your position to secure profits and avoid potential losses from the upcoming decline.

If you do not own the stock, open a short position to benefit from the expected price drop.

Benefits of Trading the Hanging Man Pattern

As mentioned earlier, this pattern provides an early warning of a potential uptrend reversal to a downtrend. This helps in avoiding risks and developing the appropriate strategy at the right time.

This pattern also provides accurate insights into potential support and resistance levels. This facilitates the identification of ideal entry and exit points, especially when combined with other technical analysis tools.

This pattern is a flexible trading tool, as it can be used across a variety of financial markets, such as stocks, Forex, and commodities.

Drawbacks of Trading the Hanging Man Pattern

It sometimes produces false signals. A candle may appear without any price reversal.

Since this pattern relies on a single candle, its signal is limited and inaccurate, so it must be combined with other confirmation tools.

The limited and inaccurate signal it provides can lead to over-analysis and over-interpretation by traders.

In highly volatile markets, patterns may form without providing any specific signal, which increases their unreliability during periods of extreme volatility.

Other Candlestick Patterns Traders Monitor

Doji

Appears on the chart as a plus sign (+) or cross. Its body is small or almost non-existent, with long upper and lower wicks/tails. It forms when the opening and closing prices are nearly identical. It usually indicates market indecision and an inability for buyers and sellers to establish a clear price direction. It has multiple forms, such as (Standard Doji, Long-Legged Doji, Dragonfly Doji, Gravestone Doji, and Four-Price Doji).

Dragonfly Doji

Appears on the chart like an inverted “T.” It is characterized by a very small or almost non-existent body, a small or almost non-existent upper wick/tail, and a long lower wick or tail. It usually forms at the bottom of a downtrend and indicates that sellers are beginning to lose control.

The Spinning Top

Characterized by a small candle body in the middle and upper and lower wicks (tails) that are longer than the body. It forms when opening and closing prices are close. Like the Doji candle, it indicates the inability of buyers and sellers to establish a clear price direction.

The Hammer

Appears on the chart in the shape of a hammer, characterized by a small body at the top and a long lower wick/tail, with a small or almost non-existent upper wick/tail. It forms at the bottom of a strong downtrend and indicates that sellers have lost control and buyers are gaining control of the market (a bullish signal).

Bearish Engulfing

This pattern appears on the chart as two candles: a small-bodied green (bullish) candle, and a large-bodied red (bearish)candle, which completely engulfs the body of the first candle and closes below its opening price. This pattern forms at the peak of an uptrend and indicates a sudden takeover by sellers during the trading session.

Hanging Man vs. Hammer

Although the two patterns are almost identical in shape, they give completely opposite signals:

Both patterns are characterized by:

A small body located at the top of the candle.

A long lower tail or wick, which must be at least twice the length of the candle body.

A small or almost non-existent upper tail (wick).

The shape of both patterns indicates that sellers pushed the price down strongly, forming the long lower tail (wick), but buyers succeeded in raising it again, forming the small body, to close close to the opening price.

However, the difference between the two patterns lies in the location of the candle and the market sentiment it reflects:

In the Hanging Man: It forms at the peak of a strong uptrend, portends a decline, and means that buyers are losing control and sellers are gaining (Sell Signal).

In the Hammer: It forms at the bottom of a strong downtrend, gives a bullish signal, and means that sellers are losing control and buyers are gaining (Buy Signal).

Hanging Man vs. Pin Bar

Although the two patterns are similar in shape (small body and long wick/tail), they are completely different in terms of their location and objective:

While the Hanging Man appears exclusively at the peak of an uptrend, the Pin Bar can appear in any location or market condition.

The objective of the Hanging Man is to define a bearish reversal. The objective of the Pin Bar is to define a general reversal, whether bullish or bearish.

Simply put: The Hanging Man warns you of a potential bearish reversal upon reaching a peak. In contrast, the appearance of a Pin Bar indicates that the market has rejected that price and may reverse the trend now.

Hanging Man vs. Shooting Star

Although both patterns are considered bearish reversal patterns, they differ in shape and context:

While the Hanging Man candle features a small body at the top and a long lower tail or wick, the Shooting Starcandle features a small body at the bottom and a long upper tail or wick.

The Hanging Man candle indicates that buyers are unable to push the price higher and that sellers are in control of the market. The Shooting Star candle indicates that the price pushed significantly higher but then quickly retreated, indicating strong selling pressure.

In nutshell

To make the right trading decision when using the Hanging Man candlestick, always look for additional confirmation before making any move.

Observe the candles following the pattern: Do they confirm the downside?

Observe support and resistance levels: Does the candle appear at a strong resistance level?

Also, be sure to incorporate the other technical indicators mentioned above to confirm the potential reversal.

Visit the Education and Analysis section of Naqdi to learn more about the candlestick patterns used by traders in the market.