Understanding the Hanging Man Candlestick
Let me explain the hanging man to you directly: it's a single candlestick pattern that shows up at the end of an uptrend and hints at an upcoming price drop.
You see this pattern during an uptrend, and it warns that prices might start falling. The candle has a small real body, a long lower shadow, and little or no upper shadow. This setup indicates that selling interest is picking up. For it to be valid, the next candle must show the asset's price declining.
Key Takeaways on the Hanging Man
As I break it down, the hanging man is a bearish reversal pattern that follows a price advance, which can be small or large but involves at least a few bars moving higher overall.
The candle needs a small real body and a lower shadow at least twice as long as the body, with little or no upper shadow. The close can be above or below the open, as long as the body stays small.
That long lower shadow means sellers took control for part of the session. Remember, this pattern is just a warning; you need the price to drop on the next candle for confirmation. That's when traders exit longs or enter shorts, but not before.
What the Hanging Man Tells You
Here's what it means: the hanging man shows a big sell-off after the open, driving the price down, but then buyers push it back near the open. I view it as a sign that bulls are losing grip, and the asset might enter a downtrend soon.
This pattern follows a price rise of at least a few candlesticks—it doesn't have to be major. It can even appear in a short-term uptick within a bigger downtrend.
It looks like a 'T,' but that's just a visual cue; it's a warning, not an automatic trigger. Confirmation comes if the price falls next, without closing above the hanging man's high. If it does fall, that's your signal to exit longs or go short.
If you're entering a short after confirmation, place a stop loss above the hanging man's high. I always use candlesticks like this with other analysis, like trends or indicators. They work on any timeframe, from minutes to months.
Example of Using the Hanging Man
Take the daily chart of Amgen Inc. (AMGN) as an example I recall: after a 33% rally from its September 2022 low, it peaked in November 2022, then consolidated, and the hanging man appeared, signaling a sentiment shift.
You'd typically enter at the open after the hanging man, with a stop at the recent high like $296.67 in this case. For a 2:1 risk-reward, set an exit at $263.07 from an open of $285.55. This trade worked in 21 days.
But keep in mind, examples like this are just illustrations. I recommend backtesting and analyzing multiple scenarios before trading on patterns like the hanging man, always with full market analysis and risk management.
Hanging Man vs. Hammer Candlesticks
The hanging man and hammer look the same, but context matters. The hammer forms after a decline and signals a bottom, with buyers regaining control by the close, hinting at an upturn if confirmed.
The hanging man, on the other hand, comes after an advance and warns of lower prices.
Key Differences Between Hanging Man and Hammer
- Hanging Man: Appears at the top of an uptrend, indicates bearish reversal, needs bearish confirmation.
- Hammer: Found at the end of a downtrend, signals bullish reversal, requires bullish confirmation.
Limitations of the Hanging Man
One issue with the hanging man, like many patterns, is that waiting for confirmation might mean a bad entry point, as prices can move fast and reduce the reward relative to risk.
These patterns don't give profit targets, so you need other strategies to exit trades. There's no guarantee of a decline even with confirmation, which is why I suggest a stop loss above the high for shorts.
Similar Indicators and Best Practices
Similar patterns include the shooting star, doji, and inverted hammer, all signaling potential reversals.
The best timeframe depends on your strategy and goals—effectiveness varies.
Pair it with indicators like moving averages, momentum tools, trend indicators, support/resistance, or Fibonacci for better signals.
The Bottom Line
To wrap it up, the hanging man has a small body at the top, long lower shadow, and no upper shadow, appearing at an uptrend's peak to signal a bearish reversal. It shows sellers pushing back against buyers, but needs confirmation via further declines or volume.
Integrate it with tools like moving averages, RSI, or Stochastic for stronger analysis, and always use stop losses to manage risk if the reversal doesn't happen.
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