The hanging man candlestick pattern: a comprehensive guide to trading reversals

What is the hanging man candlestick pattern?

The hanging man is a single candlestick pattern that typically appears when an asset is on an uptrend, signalling a potential reversal to a downtrend. It is a visual cue that the upward momentum might be losing steam, and sellers are entering the market in larger volumes, exerting pressure on the price. 

The pattern indicates a distinct shift in market sentiment from bullish to bearish. A hanging man is a signal to enter the market by opening a short position or to exit if you’ve been trading a long position.

While its appearance suggests a potential reversal, pro traders look out for confirmation before liquidating a long position or opening a position to go short.

Anatomy of a hanging man candle

The hanging man is easy to recognise. It is a small-bodied candle near the peak of an uptrend. The small body means that the opening and closing prices were relatively close to each other, indicating almost equal buying and selling pressure. The fact that it's near the top suggests that the price was being pushed down before closing, despite initial buying pressure.

Below this small real body, there is a long lower shadow (or wick). The pattern is stronger if the lower shadow is at least twice as long as the body. The hanging man has a tiny or no upper shadow.

The long lower shadow is the most important characteristic of this pattern. It shows that during the candle’s timeframe, sellers managed to push prices significantly lower. This downward pressure was followed by some buying, causing the price to rebound before the close, but the long shadow shows the emergence of underlying bearish sentiment. So, despite the strong rejection of lower prices by buyers, the fact that the shadow was long, especially after an uptrend, shows that sellers are exerting themselves.

The tiny upper shadow or lack of this shadow reinforces that the price could not extend much before selling pressure took over. This indicates the waning strength of buyers.

What about the colour of the body? The structure of the hanging man candle appearing during an uptrend is enough. It does not really matter whether the body of the hanging man candle is green/white (bullish close) or red/black (bearish close). The colour does not change the bearish implications of the pattern. 

Psychology behind the hanging man pattern

The hanging man suggests a shift in market sentiment from bullishness to bearishness. During the uptrend preceding the pattern, bulls are in complete control, pushing prices higher. When the pattern appears, it suggests that sellers have stepped in, driving the price significantly lower during the session. 

The small body of the candle, which shows that the opening and closing prices were relatively close, suggests market indecision or an almost equal tug-of-war between buyers and sellers.

The hanging man is considered a reversal signal because it highlights a moment of vulnerability during an uptrend. The long lower shadow creates a strong psychological narrative of a weakening uptrend. The tiny upper shadow means market pessimism is stark enough to prevent optimism from pushing prices too high. The pattern indicates a weakening of bullish momentum and the potential for a bearish takeover.

Where and when does the hanging man occur?

Where the hanging man appears is crucial to its interpretation. Misinterpreting its location can lead to false signals. The pattern’s significance is completely dependent on its appearance during an established bullish trend. Since it is a sign of exhaustion among bulls, without a preceding uptrend, the pattern loses its reversal implications.

Look for the pattern near market tops or near significant resistance levels. In these areas, buying pressure typically wanes, and sellers have an opportunity to take over control. The pattern’s appearance in these areas increases its power as a bearish reversal signal.

When a pattern that looks like the hanging man appears during downtrends, it is called a hammer pattern, which is a bullish reversal signal.

How to identify the hanging man on a chart

Here’s a checklist for accurately identifying the hanging man.

Timeframe: the hanging man pattern’s implications differ depending on the timeframe you’re on. The pattern appears more frequently on intraday charts (1-hour, 4-hours) but it suggests a more significant reversal when it appears on longer-term charts (daily, weekly).

Candle checklist:

• preceding uptrend

• small real body

• near the peak

• long lower shadow

• little to no upper shadow

Confirmation techniques for the hanging man pattern

While the hanging man is a reversal signal, it’s best to avoid making a trading decision based solely on its appearance. Confirmation is key to increasing the pattern's reliability and reducing the risk of false signals.

Confirmation candle: the pattern being followed by a bearish candle (red/black) acts as a confirmation of the signal. This bearish candle closing below the low of the hanging man candle further validates the shift in momentum to the downside.

Break of low: the price breaking below the low of the hanging man candle is another confirmation. This indicates that the selling pressure that emerged during the appearance of the pattern is continuing and overcoming any remaining buying momentum.

Volume indicator for confirmation: without enough volume, the pattern loses its reliability. Remember:

• the higher the volume, the stronger the confirmation of the pattern

• a significant rise in volume on the day the pattern forms, shows growing selling pressure

• a rise in volume when the confirmation candle is formed strengthens the bearish signal

Pivot points: a hanging man forming near a significant pivot point resistance level strengthens the bearish reversal signal. 

Using technical indicators as filters

Technical indicators can be used to confirm the reversal suggested by the appearance of the hanging man pattern. Consider these:

• RSI (relative strength index) being in overbought territory (above 70) strengthens the case for a bearish reversal

• pattern appearing after the price has extended significantly above a key moving average (like 20-period, 50-period, or 200-period) suggests an imminent reversion to the mean

• a bearish crossover on the MACD (moving average convergence divergence), or when the MACD line crosses below the signal line, around the time of the pattern’s formation provides additional confirmation of weakening bullish momentum

• the pattern forming near the upper Bollinger band suggests that the price is at an extreme and due for a pullback

• VWAP (volume weighted average price) is an indicator that can confirm the hanging man pattern. If the pattern appears significantly above the VWAP, it suggests that the price is stretched too much from the average traded price, making a pullback more likely.

Past performance is not a reliable indicator of future results. Market shifts aren’t guaranteed.

Trading strategies using the hanging man

Once you have identified a potential hanging man pattern can be integrated into various trading strategies.

Entry after confirmation

The optimal entry point is after the confirmation signal, such as the close of a bearish candle following the hanging man or a break below its low. Entering too early, without confirmation, significantly increases the risk of a false signal.

Stop-loss placement

Risk management is as important as knowing how to trade the hanging man candlestick pattern. For a short trade initiated after confirmation, consider stop-loss placement just above the high of the hanging man candle. This placement provides a protective measure, as a move above this high would invalidate the bearish reversal scenario.

Take-profit targets

Take-profit targets can be determined by using support levels. Identify previous support levels where prices have bounced in the past. Alternatively, you can use Fibonacci retracement levels from the previous uptrend as potential take-profit targets. Common levels include 38.2%, 50%, and 61.8%. There are some psychological levels, which are previous swing lows, that can serve as take-profit targets.

Risk-reward analysis

Before entering a trade, always perform a thorough risk-reward analysis. Ensure that the potential profit outweighs the potential loss. Experienced traders set their risk-reward ratio at 1:2 or higher. Leveraged trading amplifies both your gains and your losses, which increases risk.

Common mistakes to avoid

Knowing what to avoid is as important for smart trading as learning what to do.

Confusing the hanging man with other patterns: a common mistake is confusing the hanging man with a hammer, which is a bullish reversal pattern that appears in a downtrend, or a doji, which indicates extreme indecision but not necessarily a reversal. Always remember the importance of the preceding trend for accurate identification of the hanging man.

Trading without confirmation: the risk of false signals and consequently potential losses increases significantly if you trade the hanging man without waiting for confirmation. Patience is key to using this pattern.

Ignoring trend context: remember that there must be a preceding uptrend for there to be a downward reversal. The hanging man should not be used as a signal for bullish reversals, as this will lead to inaccurate predictions.

Overreliance on single candles: no single candlestick pattern should be the sole basis for trading decisions. Always combine the hanging man with other technical analysis tools and indicators.

Ignoring other factors: not staying abreast of the news, economic data releases or earnings reports, can lead to losses. Even if the pattern forms and is confirmed by a subsequent bearish candle, an important event in the news can suddenly impact market sentiment. 

Hanging man vs similar patterns

Understanding similar candlestick patterns can help you more accurately identify the hanging man.

Hanging man vs hammer

Both have a small real body near the top and a long lower shadow. The key differentiator is the preceding trend. The hanging man appears after an uptrend (bearish reversal), while the hammer appears after a downtrend (bullish reversal).

Hanging man vs shooting star

Like the hanging man, the shooting star is also a bearish reversal pattern that appears after an uptrend. However, its structure is different: it has a small real body near the bottom and a long upper shadow, indicating that buyers tried to push the price higher but were decisively rejected.

Hanging man vs bearish engulfing

The bearish engulfing pattern is a two-candle pattern where a large bearish candle completely engulfs the preceding bullish candle, signalling a strong bearish reversal. While both hanging man and bearish engulfing are bearish reversal patterns, their visual structure and the number of candles involved differ.

Here’s a quick comparison table to help you understand the differences.

Advanced technical applications

Here are some insights from more experienced traders using the hanging man pattern.

Volume divergence

Bearish volume divergence occurs when the price makes new highs in an uptrend, but the volume is declining. If a hanging man forms during such a divergence, it further reinforces that the bullish momentum is weakening, pointing to a potential reversal.

Multi-timeframe analysis

Analysing the hanging man across multiple timeframes can provide a more reliable view of the state of the market. For example, if a hanging man appears on a daily chart, you can zoom into a 4-hour or 1-hour chart to look for additional bearish signals or confirmation.

Alternatively, if you spot the pattern on a smaller timeframe and then see it appearing at a key resistance level on a larger timeframe, this can be a powerful signal.

Real-market examples

To understand this better, let’s take the example of the silver futures daily chart from April to August 2024. The price of silver had climbed steeply through April, and the uptrend was maintained, although less aggressively, through May and till mid-June. On the 14th, a hanging man candle was formed, at $28.  On the 29th, a bearish candle appeared, confirming an increase in selling pressure. The price subsequently fell from $28 (where the pattern appeared) to below $26 over the next two days. Over the next month, silver began a downtrend that took the price below $24 by mid-August. 

Past performance is not a reliable indicator of future results.

Pros and cons of the hanging man pattern

Like any trading tool, the hanging man has its advantages and disadvantages.

Summary & key takeaways

The hanging man candlestick pattern is easy to identify and can be a powerful signal of bearish reversals after an uptrend. By understanding its anatomy, the psychology it represents, and the crucial role of confirmation, traders can significantly enhance their market analysis.

Remember that the hanging man pattern must appear at the peak of the uptrend or near resistance levels to be considered as a reversal signal. Also, wait for a bearish candle to close below the pattern’s low, ideally with increased volume, as confirmation. Some traders place stop-loss, above the high of the hanging man candle, and take-profit targets, at support levels, Fibonacci retracements, or other significant price levels.*

Combine the hanging man with other technical indicators for confluence. Consider multi-timeframe analysis for a more comprehensive view.

By adhering to these guidelines and practising diligent analysis, you can incorporate the hanging man candlestick pattern into your trading strategies.

*Stop loss orders are not guaranteed. Guaranteed stop loss orders (GSLOs) incur a fee if activated.

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