What is the Hanging Man Candlestick Pattern?

How would you forecast that the price of an asset or security is going to go down, and by how much? One way of identifying this phenomenon is through the use of the hanging man candlestick pattern, which is the bearish version of the hammer candlestick pattern. It can occur at both support and resistance levels, but it’s most commonly found at support levels, especially after the price has fallen sharply.

Candlesticks with tall or long wicks can be considered hanging man patterns if they form at support levels after previous price movements have created lower highs and lower lows. According to some analysts, this pattern indicates exhaustion among buyers, which could lead to a price reversal in the future.

Hanging Man Candlestick Pattern

A hanging man is a bearish reversal pattern that forms when the market opens at or near its high, rallies, and then closes at or near its low, making it look like a man hanging upside down. The colour of the candle depends on whether the closing price was higher or lower than the opening price, with black signifying the lower end and white meaning the higher end. This makes it easy to visually determine if there’s been any change in sentiment between open and close, which can be especially helpful if you’re watching charts over longer periods.

In an uptrend, a hanging man candlestick forms when prices open lower than and close significantly higher, yet there is no real body since it gapped up from the previous session low. A hanging man is defined by at least three of the following criteria:

1. High price (exceeding recent high),
2. Long upper shadow (meaning not much candle body or lower close)
3. Closing at or near its lows rather than bouncing off them after making large moves in either direction.

To qualify as a true hanging man candlestick, each must occur within at least four candles of each other in an up-trending market.

How to identify the Hanging Man Candlestick Pattern?

The hanging man candlestick pattern signifies that a bearish trend may be over and that prices may now rise. To qualify as one of hanging man candlestick patterns, the sequence of market events need to meet the following four of these conditions:

• First, there must be a white body (open and close).
• Second, during most of its duration as a white body, it must trade below its open price.
• Third, it should have very little upper wick; if there is any upper wick at all then it’s not hanging but more like ‘dipping’.
• Fourth, after forming a long white body followed by a long black body (close; open), price movement above its high would result in confirmation of a bullish reversal.

This pattern is considered quite rare. Therefore, traders will often wait for multiple confirmations before considering taking action.

How to Trade using the Hanging Man Pattern?

The hanging man pattern is similar to a Doji, except that it has a body. There are two varieties of hanging man: bullish and bearish. A bullish hanging man occurs when prices open higher and close lower than the previous day’s price whereas a bearish hanging man occurs when prices open lower and close higher than yesterday’s price.

The bullish version of this candlestick pattern indicates indecision among market participants as they decide whether to buy or sell. When coupled with other information, such as prices breaking above resistance or decreasing volume, you can use bullish hanging men to time your buys. The opposite holds for bearish hanging men—you can use them to time your sales. You should always confirm these patterns with additional technical analysis before making any trades.

To identify a hanging man pattern, examine price action to past resistance levels. If you spot what you believe to be a clear-cut hanging man candlestick in an up-trending market, you’ll want to look for confirmation to buy puts or sell calls with confidence. Use volume indicators like put/call ratios and open interest figures for help. Keep in mind that only confirmed patterns should trigger trades because false signals tend to get reversed quickly. Always use stops and be willing to cut your losses short if your prediction does not pan out as planned.

Final Words

The hanging man candlestick pattern can indicate that a stock price will go down over time. As with any other candlestick pattern, the hanging man doesn’t always lead to an immediate drop in price, but can often mean that you should be cautious about further investing. If you own shares in a company and see a few hanging men appear before an earnings announcement, consider selling your shares before news breaks.

Frequently Asked Questions

What are the Advantages and Limitations of Hanging Man Candlestick?

The main advantage of a hanging man candlestick pattern is that it indicates a reversal. A hanging man candlestick consists of a candle with a small real body and long upper shadow – resembling a man hanging by his toes – which means that if an investor sees it on their chart, they should probably sell or close out their position.

However, the hanging man can signal a reversal of price trend, but it should never be used as an entry signal by itself because there are times when it does not lead to a reversal in price trend. Traders must also look out for fake hanging man patterns.

Why Is a Hanging Man Pattern Bearish?

A hanging man pattern represents a downswing in a price trend after an advance. It’s called a bearish hanging man because of its shape— it forms when prices decline to make a higher low, before another lower low. To form a bearish hanging man pattern, the price must decline after an uptrend (from point A to B) and then continue to make another lower low (from point C to D).

What is the Difference between Red and Green Hanging Man?

The main difference between a red and green hanging man candlestick pattern is that in a green hanging man candlestick, prices decline below both of their previous lows. A red hanging man will have prices go up above both of its previous highs during the session. A Green (bullish) Hanging Man opens below its body low, while a Red (bearish) one opens above its body high. The rest of their body resembles a standard Shooting Star.