Hanging Man’ Candlestick Pattern Explained

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Hanging Man’ Candlestick Pattern Explained

Introduction

The titles of candlestick designs are highly colorful and evocative. Their names are helpful in understanding what sorts of patterns they are and where they are likely to be found on the chart. The hanging guy is as frightening as it sounds in this situation. It represents a bearish reversal pattern.

All individual candlesticks are built from four data points. There are four of them: open, close, high, and low. These data elements enable the knowledgeable trader understand the current situation of the conflict between the bulls and bears, who make up the bulk of market participants. Candlestick patterns may emerge in many time periods, however we will focus on daily price patterns in this case.

Appearance of the Hanging Man

A single candle stick design is used to create the hanging guy. Because it is a reversal pattern, there must be something for it to reverse before the pattern appears. The market does not have to be in an uptrend, but there must be a visible price increase prior to the formation of the pattern.

The hanging guy is an example of a spinning top candle. These are genuine candles with little bodies. The size of the shadows is unimportant in the construction of the spinning top; what matters is the tiny size of the true body. The size of the shadows vary and might range from no shadows to shadows that are the same size on top and bottom, to shadows that are stretched on top or bottom of the actual body. Spinning tops may also be seen in other candlestick patterns like the morning and evening star.

The spinning top in this case has a small or non-existent upper shadow and a lengthy below shadow. This pattern is known as a hanging man when it appears during an uptrend or price increase. It is referred to be a hammer when it occurs following a price decrease or during a downtrend. As we will see, the meanings of these two candlestick formations are radically different. As with other candlestick patterns, the location of the pattern on a price chart is critical to its interpretation.

Construction of the Hanging Man

Four data points, as with other candlestick patterns, are utilised in their formation. The open and close are both at the top of the pattern. The true body is tiny since the two datapoints are close together. The hanging man’s genuine body may be black or white, but it must be little. The hanging man’s lower shadow will be two or three times the length of his actual body. The candle’s low and high (in our instance, trading day) are at the extreme ends of the price range throughout the trading day. An upper shadow may or may not exist. There will be a slight above shadow if there is one. However, the upper shadow is generally absent, indicating that the open or close and the high are the same.

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Key Takeaways

  • The hanging man is a candlestick pattern that refers to the form and look of the candle, signaling a probable reversal in an uptrend.
  • Candlesticks show the high, low, opening, and closing prices of an asset over a certain time period and indicate the effect of investors’ emotions on prices.
  • When two requirements are met, the hanging man appears: an asset has been in an uptrend, and the candle has a tiny true body and a lengthy lower shadow.

Understanding Basic Candlestick Charts

Understanding the Psychology

Bulls and bears are engaged in a war throughout all time eras. This never-ending conflict is interpreted using price charts. Candlestick charts give a very visual understanding of price trends. A trader might obtain an instant visual signal as to who is in charge of the market by looking at a certain candlestick pattern. Candlesticks, which were first utilized by rice dealers in Japan in the 1700s, have acquired appeal in the West due to their colorful names and ease of interpretation.

The hue of the hanging man’s actual body is irrelevant. A tiny genuine body and a lengthy lower shadow are required. The bottom shadow must be at least twice as long as the genuine body, ideally three times as long. The market opens at a high, with bulls in command. During the trading day, however, the bears seize control and drive the price down. The bulls reclaim control and drive the price upward. They will sometimes succeed in driving prices to close higher than the open, but they will not always succeed in pushing prices to close higher than the open. A little actual body is generated in either situation.

Image by Julie Bang © Investopedia 2019

Interpreting the Psychology

A hammer and a hanging man have the same pricing pattern, yet their interpretations are radically different. This is due to their price chart location. A hammer will be used after a price drop. It is a bullish reversal pattern because it indicates that the market fell down throughout the session, but then bulls stepped in and propelled the price upward. When the hanging man appears after a price gain, it is negative since it indicates that the price has been rising for many days. The bulls were in complete command. However, on the day the hanging man was made, bulls were first in command. However, throughout the session, the bears stepped in and drove the price down. The bulls returned and drove the price higher. However, the resurgence of bears in the market indicates that bulls are no longer in complete control.

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The chart below depicts two hanging man patterns in Meta (META), previously Facebook stock, both of which resulted in at least short-term price declines. Because hanging man patterns are only effective for measuring short-term momentum and price movements, the asset’s long-term trajectory was impacted.

Although traders often rely on candlestick forms to predict stock movement, it is also suitable to check for candlestick patterns in indexes such as the S&P 500 or Dow Jones Industrial Average. Candlesticks may also be used to track momentum and price activity in other asset types, such as currencies or futures contracts.

Distinguishing Features

If it’s a true hanging man pattern, the bottom shadow should be at least twice as long as the body. In other words, traders want to see that extended lower shadow to confirm that sellers intervened strongly at some point during the candle’s creation.

According to Thomas Bulkowski’s “Encyclopedia of Candlestick Charts,” the longer and lower the shadow, the more important the pattern. He evaluated 20,000 hanging man silhouettes using historical market data. Those with longer shadows outscored those with shorter ones in most circumstances. Some traders may search for high trading volume as well. Bulkowski’s study backs up this claim. He found that candlesticks with higher trading volume were stronger indicators of price movement down than those with lower volume.

The existence of a confirmation candle the day following a hanging guy emerges is another distinctive element. Because the hanging guy suggests a price reduction, the signal should be reinforced by a price decline the next day. This might occur as a result of a gap down or the price just going lower the next day (lower close than the hanging man close).According to Bulkowski, such instances may predict a subsequent price reversal up to 70% of the time.

It’s worth mentioning that the hue of the hanging man’s actual body is unimportant. All that counts is that the actual body is modest in comparison to the lower shadow.

Trading the Hanging Man

Hanging man patterns with above-average volume, extended lower shadows, and a selling day have the highest potential of causing the price to go downward. As a result, they are fantastic patterns to employ as a foundation for trading.

If you detect such a pattern, try entering a short trade around the end of the down day that follows the hanging man. A more aggressive method is to enter a trade at the hanging man’s closing price or near the start of the following candle. Set a stop-loss order above the hanging man candle’s high. The chart below shows the potential entrances as well as the stop-loss placement.

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One disadvantage of candlesticks is that they do not give price goals. As a result, continue in the trade as long as the downward momentum persists, but exit when the price begins to climb again. Hanging man patterns are only reversal signs for the short term.

A Question of Reliability

The pattern is merely a weak predictor of a reversal when searching for any hanging guy. When you search for certain features, it becomes a lot better predictor. Bulkowski is among those who believe the hanging man structure is untrustworthy in and of itself. According to his study, when the hanging man shows on achart, the rising price trend really continues a small majority of the time.

However, there are other indicators to watch for that raise the likelihood of the price dropping following a hanging guy. These include higher-than-average volume, longer lower shadows, and selling the next day. Looking for hanging man candlestick patterns with all of these features makes it a stronger forecast of price movement downward. Stick to trade just these powerful patterns.

Hanging Man vs. Shooting Stars and Hammers

There are two additional candlestick designs that are comparable. This may cause some misunderstanding.

The hanging man, like shooting stars, emerges towards the peak of an uptrend. The little genuine body of a hanging guy is towards the top of the full candlestick and casts a lengthy lower shadow. A shooting star features a little genuine body near the candlestick’s base and a lengthy higher shadow. A shooting star is essentially an upside-down hanging figure. Shadows should be at least twice the height of the actual body in both circumstances. Both imply a possible price decline.

The hammer and the hanging man are both candlestick patterns that suggest a trend reversal. The sole distinction between the two is the kind of trend in which they emerge. The hanging man pattern shows on a chart with an upward trend signaling a bearish reversal. It is a hammer if it emerges in a downward trend signaling a bullish reversal. Apart than that, the patterns and their components are identical.

The Bottom Line

Men are routinely hanged. When you highlight them all on a chart, you will see that the majority of them are poor forecasts of a price move down. Increased volume, a sell-off the following day, and longer, lower shadows indicate that the pattern is becoming more dependable. If you’re going to trade it, set your stop loss above the hanging man high.

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