Stocks, you buy, trade, and sell frequently gain and even lose some money. With the thrill of it all, what is not to love? Plus, for serious traders, there are so many different candlestick patterns available to leverage in making informed trading decisions. In this particular article, we will discuss one such popular candlestick pattern – the hanging man pattern.
The hanging man pattern is a single candlestick bearish reversal pattern that is found on the price charts of financial assets during the peak of an uptrend. Its appearance symbolizes that the uptrend in asset’s price might be approaching its end and a bearish reversal is likely.
If candlestick trading intrigues you, you’re in the right place. In this article, we will briefly discuss what the hanging man pattern is as well as how it relates to the bullish and the bearish candlestick trading.
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Table of Contents
How to Identify a Hanging Man Pattern in Candlestick Trading?
If what you are looking at is a true hanging man pattern, you will see that it comprises of a single candlestick that forms after an uptrend. The bottom wick will be at least twice as long, as the actual body itself.
This is confirmation to traders that at any given point sellers assertively stepped in during the creation of the candle. Also, there should be little to no upper wick.
The Hanging man pattern should occur during the upper end of the trading range.
There are five different ways to characterize a hanging man candlestick:
- Upward trend: An upward trend or uptrend is one of the prerequisites for the formation of a true hanging man pattern.
- Opening level: The hanging man candlestick can either be a green candle (bullish), or a red candle (bearish). The bearish candle, however, provides a better warning of a declining market.
- Upper wick (shadow): A small upper wick signifies that there was an attempt to sustain the current uptrend before the price fell.
- Long lower wick: This is probably one of the most important parts of the candle itself. The longer lower wick represents a major sell-off just before the bulls tried to regain some ground by forcing the closing price to end up closer to opening levels. This process makes the candle (body) shorter, while pricing remains down for the period.
- Closing level: If the closing level is below the opening level, it then validates that it is a bearish hanging man candlestick.
How to Interpret Hanging Man Pattern?
A hanging man pattern exemplifies a sizable sell-off after the opening. This then sends the price plummeting. Next, buyers then push the price back up near the original opening price. Traders often view a hanging man as a sure sign that the bulls are starting to lose control. Often indicating that the asset may soon enter a downtrend.
How to Improve the Reliability of Hanging Man Pattern in Candlestick Trading?
There are things to look for that can increase the chances of the price collapsing following a hanging man. These include:
- Above-average volume,
- Longer lower wicks, and
- Selling on the next day.
By looking for hanging man candlestick patterns with all these characteristics, it becomes a better prognosticator of the price becoming lower. It is favorable to trade these strong types of patterns.
The best way to improve the reliability of a hanging man is to use a candlestick chart pattern with other technical assessment statistics such as:
- Stochastics in the overbought conditions,
- Moving average,
- Support,
- Resistance, and
- Volume etc.
Adding these tools to your analysis will deliver a more reliable trade structure than the use of a candlestick pattern alone.
How to Trade Hanging Man Pattern in Candlestick Trading?
Next, we will be discussing two of the many different strategies that can be used when trading the hanging man pattern in candlestick. The first strategy is trading the hanging man pattern with an uptrend condition. The second strategy is a hanging man and a volatility filter.
Strategy 1: Trading Hanging Man Pattern with an Uptrend Condition
In this strategy, the objective is to try to determine the length of the trend, and only take an indication from this pattern if the bullish trend is longer than the limit you set.
The best way to do this is to measure the span of the last uptrend and decide only to enter if the current uptrend is longer than the previous one.
The objective is to define when the trend is starting to become outdated. Think of it this way, it is to be expected that a hanging man will be lucrative if the bullish trend is nearing the end of its cycle.
Here is how you make this strategy work:
- Identify and confirm a trade opportunity – Make sure it is a hanging man and the trend is bullish.
- Determine trade entry, stop loss, and take profit levels – Enter the trade when the current uptrend is longer than the previous one, by measuring the span of the last uptrend. To do this you need to measure the length since the distance is from the low to the high.
- Execute and manage the trade – Exit the trade after five candlesticks.
Strategy 2: Hanging Man and a Volatility Filter
Another way of identifying the end of the bullish trend is with the ADX indicator. If you notice that the market has trended with a lot of assets and see that the market is now weakening, it could be a sign that the bullish trend is coming to its end.
Here is how to use the ADX indicator to make this strategy work in your favor:
- First, you want your ADX reading to be high during the middle of the trend.
- Secondly, As the market continues to incline, the trend strength declines. This means that the ADX is now in a downtrend.
Now you can enter the trade if:
- Identify and confirm trade opportunity – A hanging man has been identified.
- Determine trade entry, stop loss, and take profit levels – The ADX conditions are true.
- Execute and manage the trade – To exit the trade use a stop loss and a profit target.
Advantage and Limitations of Trading Hanging Man Patterns
Now that we have covered the basics around identifying and trading the hanging man pattern, let us take a quick look at several advantages and limitations of trading it.
Advantage of Trading Hanging Man Patterns
Descrived below are the primary advantages of trading the hanging man pattern –
- It can be used and traded in all time frames and in many different markets
- On relative terms, it is quite accurate in generating reversal signals most of the time
- It is easy to integrate this pattern with other reversal signals and indicators such as the double EMA
Limitations of Trading Hanging Man Patterns
Descrived below are the primary advantages of trading the hanging man pattern –
- It is rarely sufficient as a standalone indicator in informing the trading decisions
- When trading using it, waiting for confirmation signals often results in poor entries
- It can create false signals in volatile markets, generated by gaps and sudden price surges
Candlestick Pattern Opposite to Hanging Man Pattern
The hammer pattern is a bullish signal that takes place in a downtrend and cautions of a potential trend reversal.
This candlestick is called a hammer because it flattens out a base at the bottom of a downtrend. The long lower shadow or wick of the hammer is a bullish signal despite the color of the candlestick’s body.
It specifies that the underlying quickly sold. The demand, however, returned, therefore, forcing the price back up to close, or near, the high for that cycle.
Continuation Candlestick Patterns in Trading
The hanging man pattern provides a reliable way for you to identify a potential reversal in price trends in candlestick trading. For effective trading, in addition to knowing such reversal patterns, it is also important to have several continuation candlestick patterns in your trading arsenal.
Described below are four commonly appearing types of continuation patterns:
- Rising Three Method Patterns – This is a bullish trend indicating that the market will continue to trade higher.
- Falling Three Method Pattern – This pattern indicates three things
- The first candlestick indicates that the sellers are in control and are headed towards a strong lower closing.
- The next three candlesticks imply that the sellers are not profiting as much as they could, thanks to the new sellers that are entering the ring.
- The fifth candlestick shows that the sellers are pushing prices to a new low as they gain more control.
- Bullish Harami Pattern – This pattern works best in the uptrend, it suggests that the buyers are taking a break, therefore, making the price trade higher. There are two sure ways to tell if it a bullish Harami.
- The first candlestick is not only bigger, but bullish compared to the second candlestick. This shows the pressure to buy while the candle bullishly closes.
- The second candlestick is short and stumpy, meaning it has a smaller body and scale. This tells us that the hesitant pressure to buy and sell looks alike.
- Bearish Harami Pattern – This works best in the downtrend. It implies that the sellers are taking a break, therefore, lowering the trade price. There are two ways to tell if it is a bearish Harami.
- The first candlestick is not only bigger but more bearish compared to the second candlestick. This shows the pressure to buy while the candle closes on a bearish trend.
- The second candlestick is short and stumpy, meaning it has a smaller body and scale. This tells us that the hesitant pressure to buy and sell looks alike.
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Conclusion
In conclusion, the hanging man candlestick pattern is a bearish reversal trend that takes place during the peak of an uptrend.
It exemplifies a sizable sell-off after the opening of a trend, which then sends the price plummeting. This, therefore, indicates that the assets may soon be entering a downward trend, such as a hammer pattern.
The hanging man has many benefits, and limitations, and can be an easy pattern to use with the help of assessment tools.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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