How to Spot & Trade with the Hanging Man Candlestick Pattern

My goal is to decode the mystery of the hanging man so you can spot it easily and use it to make smarter trades. The hanging man signals the previous uptrend is losing momentum by virtue of the long downward wick. If the same single-candle pattern appears after a downtrend, then it technically is not a hanging man, it would be a hammer pattern. Context within the larger trend is important for the hanging man. Many traders are stopped out of potentially profitable hanging man candlestick trades due to tight stop loss placement, often recommended by conventional guidelines. A Japanese candlestick pattern, the hanging man is used to spot a potential bearish reversal after an asset has trended higher.

The candlestick structure of the hanging man can reveal a lot about the market psychology at a certain price. The long wick to the downside shows an increased interest to sell from the market, and the small upper candle body shows there is a decreased interest to buy. Combined together, these factors suggest an incoming trend change in the price movement.

This signals a possible bottom is near and the price could start heading higher if confirmed by upward movement on the following candle. The hanging man occurs after a price advance and warns of potentially lower prices to come. Hanging man or hangman candlestick refers to a bearish single-candlestick formation found at the topmost point of an uptrend. Traders utilize this pattern in the trend direction of pattern changes.

How the Hanging Man forms

You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Setting your SL equal to or less than the ATR value often leads to early exits. This error is common when using the traditional SL placement above the hanging man candlestick. Therefore, we recommend placing your SL and take profit (TP) to at least twice the ATR value to prevent this common occurrence. Aside from a signal for a short position, the hanging man can be used as am exit signal when you’re sitting in a long.

1. The candlestick structure of the hanging man can reveal a lot about the market psychology at a certain price.
2. Other patterns that traders find useful include the inverted hammer, shooting star, bearish engulfing, evening star, and hammer candlestick patterns.
3. This signifies there is a lot more intent to sell, rather than to buy.
4. The Hanging Man Candlestick typically appears at the end of an uptrend, signaling that selling pressure may be increasing and a bearish reversal might be imminent.
5. However, traders can use this understanding as an additional confluence to analyse whether they will enter a short trade, or stay on the sidelines for another better opportunity.

Hanging man means the same in stocks and other financial instruments traded at markets – the point at which the market tends to go for a bearish reversal. This pattern indicates a weakness in the price movement, giving the traders a chance to prepare for the incoming trend changes. Moreover, an inverted hanging man candlestick formed gets called a hammer candlestick.

1. Find out how the EUR/USD, GBP/USD, USD/JPY, and other currency pairs could change in 2024.
2. An example of this strategy can be seen here on EURUSD, 1h time frame.
3. Some traders believe it is a reliable indicator; many think it is a poor indicator.
4. Hanging men occur on all time frames, from one-minute charts right up to weekly and monthly charts.
5. Both the hanging man and shooting star patterns are bearish reversal patterns, appearing near the top as the price climbs up.

Signal

It merely suggests a potential bearish reversal and requires confirmation through subsequent price action. Moreover, the pattern’s effectiveness can often be enhanced when used in conjunction with other technical indicators and analysis techniques. The Hanging Man pattern is primarily considered a warning sign for traders, hinting at a possible reversal of the uptrend.

Incorporation in Trading Strategies

In order to inverted hanging man candlestick form a complete trading strategy, you need to understand the basic math of trading, order types, and trading psychology. Even more importantly, you need to develop your own edge and learn risk management. And if you really want to take it all the way, look into options and trading automation.

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However, there are things to look for that increase the chances of the price falling after a Hanging Man. These include above-average volume, longer shadows, and selling the following day. By looking for Hanging Man candlestick patterns with all these characteristics, it becomes a better predictor of the price moving lower. The Hanging Man candlestick pattern is characterized by a short wick (or no wick) on top of small body (the candlestick), with a long shadow underneath. If the candlestick is green or white, the asset closed higher than it opened.

The primary differentiation between a Hanging Man and a Hammer lies in their location within the trend. A Hanging Man occurs during an uptrend and signals a possible reversal to a downtrend. The color of the Hanging Man’s body can add depth to its interpretation. A red (or black) body signifies that the close was lower than the open, indicating stronger selling pressure. While the inverse hanging man is an effective pattern, we recommend that you use it in combination with other patterns and technical indicators.

Another distinguishing feature is the presence of a confirmation candle the day after a Hanging Man appears. Since the Hanging Man hints at a price drop, the signal should be confirmed by a price drop the next day. That may come by way of a gap lower or the price moving down the next day. According to Bulkowski, such occurrences foreshadow a further pricing reversal up to 70% of the time.