Hanging Man Candlestick


Hanging Man Candlestick

Simple enough, the hanging man candlestick is a candlestick pattern. Candlestick patterns are important to all traders, whether swing traders or day traders. The location of a candlestick can qualify or disqualify a trade for a trader. The hanging man candlestick forms at the top of an uptrend, typically indicating a potential reversal in the trend. The hanging man indicates the weakness of an uptrend. The pattern has a unique shape. A small body with a long tail beneath it. The pattern can be both a bullish candle or a bearish candle.

Hanging Man Candlestick-Features

Let’s start with the characteristics that define the hanging man candle stick. Below is a picture of the candle stick pattern. The key aspects of the candlestick to remember are that the body of the candle can be either red or green and it is very small. With a long tail and a very little or no top wick.

Hanging man diagram of both a bullish and bearish candle

There are two criteria that should be kept in mind when looking for a hanging man and trading the hanging man pattern. The hanging man candle forms in an uptrend. And the body of the candle is very small with a little top wick or no top wick. The significance of the candle is a loss in momentum to the buy side, demand is drying out on which ever asset you may be looking at. The buyers no longer want to pursue the upside. The little body of the candle indicates one of two things.

In a red candle scenario, the buyers tried to save the drop from occurring but only managed to push price back to a slightly negative level from a longer red area. In a green candle scenario, the buyers managed to bring price up to a slightly positive level from a very bearish day. This is a last bout of the buyers trying to hang onto the bullishness but the long tail is indicative of the sellers pressing into the asset.

The hanging man candlestick can be analyzed as an entry or exit indicator for traders. The entry would be to the short size as traders might see exhaustion to the upside. And a reversal in the trend to be the next move in the asset. Alternatively, the hanging man can be seen as an exit indicator, where long traders take profit. The pattern indicates the exhaustion of the uptrend and potential reversal. Meaning this would be a good location to take long profits.

Pattern explained

In distinguishing a real hanging man candlestick from an impostor, its important to note the length of the wick. A real hanging man pattern has a wick that is two times as long as its body. The long wick, or shadow is a good indication to traders that sellers are really aggressively trying to halt the uptrend.

Traders often look for a longer wick to form, the longer the more meaningful. Also to be accompanied by large volume on the attempt lower. The hanging man is also not a stand alone pattern, the second you see a hanging man does not mean this is the second you should short! A continuation of the reversal on this candle print would be a gap lower on the following day, or a candle that prints lower. Solidifying some sort of bearish behavior.

Some of you might be wondering, what’s with the different candle color possibilities? The color of the candle does not really matter. It is the location of the hanging man, the volume that ensues, the length of the wick and the continuation of the downtrend that should be noted.

Hanging Man Candlestick-trading

Below we’ve pasted two different chart examples of the hanging man, indicating a reversal of the current trend. On the left image, we’ve shown Apple stock, with two hanging man examples that end a bullish trend, even if its just temporarily. On the right, a hanging man pattern that ends a bullish trend for the USD/JPY Forex pair.

In the first example (Apple), you may notice that I have only indicated 2 hanging man patterns in the red box. The two green candles, and not the red wick that succeeds the first green hanging man. That is because the red candle between hanging man 1 and 2 has a shadow that is not twice as long as its body. The body of the red candle is about the same as wick. Nevertheless some traders might consider this a hanging man pattern and it would not be completely wrong to do so. The candle is a bearish candle that indicates the end of the move higher.

In the second example (USD/JPY), the body of the red hanging man candle seems a little too large to be a hanging man. But, the wick is more than double the length of the candle, and there is no top wick to the candle. This is a good indication of sellers taking control for an end to the uptrend.

When trading the hanging man pattern, traders will most likely be looking to enter a short position or exit from a long. When trading stocks, futures, or options, its important to note the volume on these hanging man candles. Is it heavy to the downside? Unfortunately, Forex does not display volume, so trading the hanging man in Forex requires price action analysis. Another aspect to note is the succeeding candle, is it bearish after the hanging man?

Trading the hanging man candle stick pattern is a little riskier because it is a counter trend trade, which could turn out to be just a stall before the move higher. That is why it is important to have a stop loss that could be placed just above the high of the hanging man to allow for some wiggle room. The target on that move could be a previous low, or to trail your stop down as the asset declines.

Below is an example of entry limits and stop loss levels when taking a trade based on the hanging man candlestick pattern. The entry on both charts, is slightly above the hanging man candle. While the stop loss is above the general structure of the move. When looking for an area to place the stop loss, first risk tolerance on the trade should be calculated. Second it is helpful to locate a previous high that will act as resistance, so you can set you stop just above that level if risk management permits.

Entry ideas and stop loss limits for Apple and USD/JPY

How trustworthy is the candlestick?

Just like any other trading criteria, if its used alone, the likelihood of success decreases. Also if its used in conjunction with too many other indicators or criteria, information overload could be created. Ultimately resulting in nothing. The hanging man candlestick pattern is no exception to these expectations. Looking at the pattern as a standstill indicator to a market reversal doesn’t have a high success rate. But combining the pattern with decreasing volume on the move higher and a failure to break a resistance structure puts more emphasis on the reversal idea. Combined with a succeeding bearish candle, you will have a useful tool in your trading arsenal.

Hanging Man Candlestick-similar patterns

The hanging man candlestick pattern might look similar to you. That is because there are others that look like the pattern! The hammer and shooting star pattern. Both to be confused for the hanging man for their respective reasons.

The hammer candlestick pattern is the hanging man pattern, but for a bearish trend. So it looks the same as a hanging man, the only difference is the location! You can find the hammer candlestick pattern at the bottom of a bearish trend looking to turn bullish. For more information, check out the following TRADEPRO Academy article. 

The shooting star candlestick pattern acts like a hanging man candlestick pattern but looks different. The shooting star pattern can be found at the top of an up trend, indicating its reversal to the downside. But it looks like an inverse hanging man. Meaning the long wick is to the upside, while the body is at the bottom of the candlestick. Below is an image of each.

Conclusion

The hanging man pattern can be a lethal tool in a trading arsenal, if used correctly. Meaning in conjunction with other criteria as we mentioned. They can be spotted easily and are not a rare occurrence in technical analysis. Always remember to use a stop when trading especially if you are trading using candlestick patterns as a main criteria.

 

 

Join our ELITE membership package and get access to the midterm elections trading room.

Good luck and good trading.

 

 

If you want to join us in our live trading room, check out the Day Trader package here >

If you prefer to trade more passively, checkout our newsletter, trade ideas and live analysis in the Swing Trader package here >


The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.