The hanging man candlestick pattern is a one candlestick pattern that can suggest the death of an up-trending market. No doubt that the hanging man is a gruesome description for a stock chart pattern, but its name gets the point across for sure!
Candlestick patterns are a form of technical analysis proven to be beneficial for all traders. Whether you day trade, swing trade, or do long-term investing, candlestick patterns can illustrate a picture and tell a story about the market participant’s beliefs.
Candlestick patterns can be a single bar or group of candles. The patterns they create can be reliable indicators of where price direction may be heading with confirmation of other technical indicators, confirmation candles, and trading plans.
Candlesticks, or bars, on a price chart tell us the opening price, closing price, and high, and low values for a financial asset in a given time period. How a candle forms and its finished attributes can hint a trend reversal may be forthcoming, a correction or price pullback is in the works, or a continuation pattern exists.
The hanging man candlestick pattern is a trend reversal pattern that appears specifically after a bullish trend. Let’s go over what hanging man patterns look like, what they mean, and how to apply their information to your trading day when it develops!
What Is a Hanging Man Candlestick Pattern?
A hanging man pattern is a one candlestick pattern. It is a bearish reversal pattern that appears after an existing bullish trend.
The market sentiment being conveyed with the hanging man candlestick pattern is that buying strength has weakened and sellers have aggressively stepped in. The candle will develop at the peak of an uptrend when buying volume stalls and selling pressure enters the market.
It is important to note that long-term price direction may be unaffected by the hanging man candle. Most traders use the hanging man pattern to detect short-term price direction changes.
What Does the Hanging Man Candlestick Pattern Look Like?
The hanging man candlestick pattern is a one candlestick pattern. The candle’s three attributes are extremely important to its significance.
1) Small Real Body
The body of the hanging man pattern should be small. This means the opening price and closing price should be relatively close in value.
The small distance between opening and closing price tells an investor that possibly an agreement in value between the bulls and bears has been reached.
The color of the candlestick pattern is irrelevant however, a bearish candle (or red) is preferred.
2) Long Lower Shadow
The hanging man candle should have a long lower shadow or wick.
The wick needs to be at least twice as long as the real body to be a valid hanging man pattern.
The long lower shadow demonstrates that volatility existed and that the sellers stepped in with more participation than the buyers.
3) Absent or Small Upper Shadow
The hanging man pattern should have an absent or very small upper shadow.
This absent or small upper wick tells us there wasn’t much buying participation to push beyond the opening price and that possibly the value of the asset has peaked.
How to Confirm Hanging Man Patterns
Like all other candlestick patterns, the hanging man formation should be recognized but its information confirmed before trade implementation.
Here is a checklist of things to look for before initiating a trade position using the pattern.
1) Does the hanging man candlestick pattern appear at the peak of an upward trend?
2) Does the hanging man candle contain the necessary candlestick pattern attributes?
3) Do we have the confluence of a possible trend reversal?
Since the pattern appears to determine a potential reversal in price, a trader should always seek confirmation of the information before opening a trade position and determining an entry point.
Techniques to validate chart patterns could be the next candle or confirmation candle, other technical analysis such as indicators, and also trading strategies.
Using the next candle to validate the bearish move can be a great indicator. Also, using technical indicators such as the MACD or RSI can confirm the possible new price action and market direction.
If the hanging man candle forms at the top of an uptrend within a supply zone or a level of resistance, that may be a significant signal that the price is about to repel and move in the opposite direction.
Fake-outs do occur, so it is important to go through your checklist and determine the validity of the reversal in price direction versus a possible continuation.
How to Trade the Hanging Man Candlestick Pattern
After you have validated the information of the hanging man pattern, you can implement their buy and sell signals. What this means is that the pattern can be used to inform a day trader when to initiate a trade entry or when to exit trades that may already exist.
If you are currently in a long position and see a valid hanging man pattern, it can act as a warning or significant sell signal. When the hanging man pattern forms, a trader going long (or desiring price to increase) may be prompted to sell their position before the price starts declining and eating up profit already earned.
If you are looking to execute trades, first confirm the reversal candlestick pattern to be valid. When the price moves in the opposite direction, it could be an opportunity to implement a short position or options put taking advantage of the new downward trend direction.
It is extremely important to emphasize that using other indicators and strategies for confirmation of the move is the key to optimizing your success!
Similar Candlestick Patterns to the Hanging Man Pattern
The hanging man single candlestick pattern can also be confused with the shooting star and hammer candlestick patterns.
The hanging man and shooting star both appear at the top of an uptrend. Both are a bearish reversal pattern; however, the key difference is the candlestick’s appearance.
The shooting star is inverted with a long upper shadow and a small real body or looks like an upside-down hanging man candle.
The hanging man formation and the hammer are shaped the same; however, the difference is the direction of the trend when they appear and their reversal type.
The hanging man appears at the top of an up-trending market signaling a possible forthcoming decline in price or bearish reversal.
The hammer is a bullish reversal and appears at the bottom of a downward trend signaling a possible increase in price action.
Summary: Hanging Man Candlestick Pattern
Hanging man candlestick patterns are trend reversal signals where buyers are losing momentum and sellers are gaining strength. The hanging man appears at the top of an upward trend.
If you are looking to trade reversals, this pattern may be more of a temporary signal than a determination of long-term price direction. That being said, the key takeaways here is to notice the candlestick pattern’s attributes and seek confirmation before trading its information. Seeking further evidence of the price reversal increases the relevance of the pattern and protects your trading capital.
All trading involves significant risk, so it is important to practice using candlestick charts and your trading edge before live trading. This simulated practice helps gauge the effectiveness of your strategies and your ability to act on the information the market is providing.
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