The Hanging Man is a single candlestick pattern that is unique and usually forms at the top of an uptrend. It indicates that the buying pressure is losing steam and a trend reversal may be in the offing. The pattern has a long lower shadow (wick), a small body, and little or no upper shadow.
Although it looks like a Hammer, the Hanging Man occurs at the top of an uptrend and indicates a possible downside movement. It shows that buyers were in control during the session’s initial moments but were overtaken by sellers by the end. The candle closed near its open.
It is bull and bear, although very powerful at the peak of the trend and is therefore mostly effective for trading a bearish one at the top of the uptrend.
How to identify Hanging Man candlestick pattern:
- It can be located as appearing on the charts by positioning; at the top of the trend or in this case the beginning of its slowing of its momentum of an upward swing and perhaps an approach for the building of the upside-down movement.
Appearance:
A Hanging Man has a small body near the top of the candle with a long lower wick, typically at least twice as long as the body. The upper wick is very short or missing.
Types:
There are three possible shapes the pattern can have:
- Bullish Hanging Man: Price opens and closes higher but the body at the bottom indicates the market has rejected the higher price.
- Bearish Hanging Man: The opening and closing price is lower but has a long wick on the lower side.
- Neutral Hanging Man: The open price is equal to the close, showing a Doji candlestick.
The most effective reversal is the bearish Hanging Man, which says the price action may well break downwards after an upward phase.
How to trade a Hanging Man Candlestick pattern
Trading the Hanging Man pattern involves identifying its formation and determining key entry and exit points. Here’s how to trade it:
Identify an Uptrend:
First, ensure that the market is in a clear uptrend. The Hanging Man will not be effective unless it forms at the peak of an uptrend.
Look for the Hanging Man:
Once the uptrend has peaked, the Hanging Man candle should form, indicating that buyers are losing control. Pay attention to the size and position of the body and wick.
Place a Sell Order:
To trade this pattern, place a sell order just below the lower wick of the Hanging Man candle. This will indicate that the bearish momentum is likely to continue.
Set Stop Loss:
The stop-loss should be placed above the upper wick of the Hanging Man. This gives the trade room to move but ensures you’re protected if the market reverses.
Determine Profit Targets:
The profit target can be set a few levels below the entry point. Use support or resistance levels, Fibonacci retracements, or other technical indicators to help establish a reasonable target.
Example Trade Setup
In the example below, after a long uptrend, a Hanging Man appears at the top. This is a sign that the bullish momentum is weakening and that a downward move is expected. Traders can potentially profit from this by selling under the lower wick of the Hanging Man and setting a stop above the upper wick. The risk-to-reward ratio in such trades can be quite favorable, leading to profitable outcomes.
Advantages and Disadvantages of Trading the Hanging Man Candlestick Pattern
Advantages:
- Clear Appearance: The Hanging Man is very easily recognizable, even for beginners.
- Intuitive Trading: The meaning of the pattern (reversal) is obvious, and the rules for entering trades are easy to understand.
- Universal Application: The Hanging Man can be found in all timeframes and currency pairs, so it is versatile.
Disadvantages:
- False Signals: Like any candlestick pattern, the Hanging Man can give false signals, particularly in volatile or choppy markets.
- Ineffectiveness in Shorter Timeframes: The pattern is not as reliable in shorter timeframes (such as 1-minute or 5-minute charts), where price action can be more erratic and noisy.
- Expensive on Larger Timeframes: If you’re trading the Hanging Man on daily, weekly, or monthly charts, the required stop-loss can be quite large, making it more expensive to trade.
Key Takeaways
- The Hanging Man is a bearish reversal candlestick pattern that occurs at the top of an uptrend.
- It is in the shape of a candle with a small body and a long lower wick, which indicates a change in momentum from buying to selling pressure.
- The best version of the Hanging Man for identifying potential trend reversals is the bearish one.
- Trade the pattern by placing a sell order below the lower wick, with a stop-loss above the upper wick, and set a profit target below the entry point.
- Always use risk management strategies to protect your capital, as the Hanging Man is not infallible.
