A hanging man is a bearish reversal pattern that is formed after the bullish trend and can be seen in candlestick patterns. The formation of a candle is identical to the hammer – it has a long lower shadow (wick), a small upper body, and little or no upper shadow (wick). It shows the weakness in a bullish trend and symbolizes a potential selling trend in the market.
However, the major difference between a hammer and a hanging man is that the hammer is followed by a bearish trend while a hanging man is followed by a bullish trend.
What Does the Hanging Man Candlestick Tell You?
A hanging man shows up when a stock starts high, drops, but then rises back close to where it began. This suggests that buyers struggle to keep the price up after a big drop. It might mean the start of a downward trend.
This pattern happens after the price has been going up for a while, even if it’s just a little. It can pop up during a small rise in a bigger fall.
The hanging man candlestick looks like a “T”. But remember, it’s just a sign to watch out, not a clear reason to make a move.
The hanging man pattern isn’t confirmed unless the price falls after it or soon afterward. If the price doesn’t go higher than the hanging man candle’s high, it might show another drop is coming. When the price falls after a hanging man, traders might take it as a sign to sell or bet against the stock.
If you decide to bet against a stock after seeing a hanging man, you might set a limit to protect yourself if the price goes back up too high.
People don’t usually rely only on hanging men or candlesticks to make decisions. They often look at other factors like price trends or technical indicators.
You can see hanging men on different time frames, from short-term charts to monthly ones.
The Difference Between the Hanging Man and Hammer Candlesticks
The hanging man and the hammer candlesticks seem the same, but they mean different things depending on the situation. The hammer appears after a price drop. It shows that although there was strong selling, buyers took control by the end, suggesting the price might go up soon, especially if the next candle also shows upward movement. On the other hand, the hanging man shows up after the price has gone up. It suggests that prices might drop later on.
Key Differences Between the Hanging Man and Hammer Candlesticks
Hanging Man
Where it Appears: Shows up near the end of a rising trend
What it Means: Suggests that the trend might change to a downward one
Confirmation: Usually needs more signs that the trend will go downward after the Hanging Man pattern
Hammer
Where it Appears: Seen when a downtrend might be finishing
What it Means: Shows a possible shift to a rising trend
Confirmation: Should be supported by more signs indicating the trend will go upward after seeing the Hammer pattern
Limitations of Using the Hanging Man Candlestick
The hanging man and many candlestick patterns have a limitation. Waiting for confirmation can lead to a bad entry point because the price can change quickly in just two periods. The potential reward from the trade might not be worth the risk anymore.
It’s tough to know the reward at the beginning of the trade because candlestick patterns usually don’t show profit targets. Traders have to rely on other candlestick patterns or trading strategies to exit trades started with the hanging man pattern.
Even if there’s confirmation, there’s no guarantee the price will drop after a hanging man forms. That’s why it’s suggested to set a stop loss, which controls risk, above the high of the hanging man when starting a short trade.
FAQs
There are some signs that traders look for to tell if the market might change direction. One of these signs is the hanging man. But there are other signs too, like the shooting star, the doji, and the inverted hammer. Traders keep an eye on these patterns because they can show when the market might reverse.
How well the hanging man candlestick pattern works can change based on the timeframe it’s used in. It might be best on a certain timeframe depending on what the trader wants to achieve with their strategy.
Using the hanging man pattern with other technical indicators can make its signals more reliable. The indicators you choose depend on your trading strategy. Typically, combining indicators that show momentum and trends can work well. Some good indicators to consider are moving averages, momentum indicators, trend indicators, support and resistance levels, and Fibonacci retracements.
Conclusion
The Hanging Man Candlestick Pattern is an important part of technical analysis. It shows a small body at the top of a trading range, with a long lower shadow and almost no upper shadow. This pattern usually happens when an uptrend is at its highest point, suggesting a possible switch to a bearish trend. It’s important to notice because it means that although buyers had control at the start of the session, sellers managed to push prices down before closing near the opening price. However, just seeing this pattern isn’t enough to confirm a trend reversal. Traders need to look for more signs like continued bearish price movements or increased selling volume.
To use the Hanging Man pattern effectively, traders should combine it with other technical tools for better analysis. This could mean using moving averages to understand the current trend and using momentum indicators like the Relative Strength Index (RSI) or Stochastic Oscillator to check market conditions. Also, considering support and resistance levels can help traders understand the situation better and improve the predictive ability of the Hanging Man pattern. Like all trading strategies, it’s important to manage risks well by setting stop-loss orders to reduce potential losses if the expected trend reversal doesn’t happen.