Trading in the stock market is all about candlesticks, charts, and patterns. There is so much for a budding trader to learn that it all gets confusing at some point. If you are one such trader, we know how hard it can be for you to get accustomed to the terminology and different candlestick pattern and tools.
What if we tell you that you don’t have to memorize everything?
Yes, that’s right! When it comes to candlestick patterns, there are only a few important ones that you have to know everything about. The hanging man candlestick pattern is one of them. Let’s get started with the basics:
What is the Hanging Man Pattern?
The hanging man candlestick is indicative of a bearish reversal pattern. It usually makes an appearance after a bullish trend that has lasted for quite a while.
You may consider the hanging man as the exact opposite of the hammer candlestick patterns.
When it comes to the structure, both appear as similar candlestick patterns. However, we can easily tell them apart based on their placement on the candlestick charts.
The hanging man is a commonly known candlestick pattern that most people refer to support their technical analysis for the price action of the security they wish to invest in.
Generally, the hanging man candlestick pattern helps in price action trading so the traders can pick out reliable points for price reversal.
Read More: Detailed Analysis of Candlestick Patterns
Structure of Hanging Man Candlestick Pattern
Just like a hammer, the hanging man is a single candlestick pattern that basically has a small real body accompanied by a long lower shadow or wick. The wick has to be, at least, twice the length of the real body. Moreover, the hanging man candle has a very small upper shadow, if any.
The hanging man candlestick pattern can be formed as any of the following:
Green(Bullish): It means that the closing price and high of the candle will be the same, whereas the opening price is a bit lower.
Red(Bearish): It means that the opening price of the candle and the high are the same, but the closing price is low. A red candle is indicative of a stronger bearish signal.
It is important to note that the color of the body of the candle does not matter much because the hanging man is always a bearish candle. However, a hanging man formation in green color is not considered as stronger as the red one as it indicates that the day closed with gains…
Now coming to the lower shadow, you must know that the effectiveness of a hanging man candlestick pattern is decided by the length of its lower shadow in comparison with the candle’s small real body.
Ideally, a reliable hanging man appears with a lower shadow that is, approximately, two times longer than the size of its small body. A long lower shadow indicates that there is an increased selling possibility because the bulls have taken the stock price higher than it should be.
Read more: 20 Stock market terms for beginners
Identifying Features of the Hanging Man Candlestick
Till now, you already know that the hanging man candlestick formation has a small real body with little to no shadow at the upper end, but a long shadow at the lower side.
Now, the hammer appears to have similar characteristics but it is usually associated with a bullish reversal. Whereas, the hanging man indicates a bearish reversal. So, how will you distinguish between the two candlesticks?
Here are a few aspects that you should look for:
Upward Trend: The first and the most important condition that differentiates these candlesticks is that the hanging man pattern forms at the top of an uptrend. It indicates a potential reversal and an increase in selling pressure.
Opening Level: The opening level could be above or below the closing prices indicating that the candlestick pattern can either be bullish or bearish. However, you will know that when a bearish hanging man occurs in a chart, it hints toward a significant selling.
Upper Shadow: The hanging man is a single candlestick pattern with an insignificant shadow at the top that shows that the bulls tried to maintain the uptrend but they faced a price decline.
However, when you see a candlestick with a long upper shadow while trading, you should know that it is a shooting star. Confused? Well, the upside-down versions of the hanging man are called shooting stars.
Long Lower Shadow: A longer shadow in the bottom shows that the price movement of the entire candlestick was high. It happened because both the bulls and bears were trying to influence the price.
The bulls were trying to keep the prices stable but the bears have pulled the prices downwards. However, in the end, the bulls tried to push the price upwards and managed to close the candle near the open.
The Confirmation Candle: The next candle that forms right after the hanging man confirms the reversal pattern. This candle shows you exactly whether the prices will move down or continue in a different direction.
This candle is quite important because it tells you whether you should enter a trade or not.
How Do Hanging Man Candlestick Patterns form?
Let us have a look at the events during a trading day that lead to the formation of the hanging man:
- A certain chart shows continuation patterns of rising prices
- A new candle opens and the bulls try to maintain the price
- Seeing high prices, the bears start selling the stocks causing the prices to fall
- The bulls, once again, try to push the price higher and manage to close the candle near the opening price
All this results in the formation of the hanging man that offers sell signals.
Example: What Does the Hanging Man Pattern Tell You?
We have already established that the hanging man pattern shows you that there are chances of a downward trend during the next trading day. So, in the most straightforward words, the hanging man tells you to enter a short trade.
However, you need to use other indicators and trading strategies to determine the trading range.
In the above example of Castrol-India, we can see the prior trend was an uptrend. Then Hanging man appears on the chart. This leads to a bearish reversal.
Why is Hanging Man Candlestick a Bearish Pattern?
The hanging man is a bearish pattern because when this pattern forms, we notice a lot of fluctuation in the prices. This indicates that the sellers are testing the resolve of the buyers to resist trade reversals.
What to do When You Spot Hanging Man Patterns?
Whether you are into full-fledged forex trading or you prefer to trade in specific asset classes, you have to understand that it is not always necessary to enter a trade. If you enter a trade solely because you have spotted a strong hanging man on a daily chart, you will be facing significant risk.
Reference: Best technical analysis indicators
Most traders will suggest you seek independent advice from industry experts, while also considering technical indicators before entering a trade. Additionally, you should also analyze the placement of other candles like shooting stars and the evening star.
The hanging man is a single candlestick pattern that offers a bearish view of the spectrum. While its structure is similar to the hammer, its indication and placement are the exact opposite.
The color of the candlestick pattern does not matter as much but it is the lower wick that you should look out for. You already know that it should be double the size of the body of a candle.
Even though the candlestick pattern offers a strong signal for the market to move downwards, you should not act out on the basis of this candlestick alone. It would be better if you refer to experienced people or use technical indicators to confirm the reversal before making a move.
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