Understanding The Hanging Man Candlestick Pattern
The candlestick patterns were first introduced to the western world by Steve Nison. The patterns are vital tools for the technical analysis of the stock market. There can be one or more candlesticks in the pattern. If the colour of these longitudinal bars is green or light, they indicate a bullish market.
In a bullish market, the opening price of the security during a defined trading period is higher than the closing price. Similarly, if the colour of the candlesticks is red, it refers to a bearish market. Here, the closing price of an asset is higher than the opening price.
The wick is an essential characteristic of candlesticks. The wick is also known as the shadow. It signifies the opening and closing prices of a security. In a green candlestick, the upper end of the wick represents the closing price, while the lower end indicates the opening price. In a red candlestick, the upper end of the wick tells you the closing price, while the lower end reveals the opening price.
Also Read: Long Wick Candlestick Trading
Candlestick patterns are of different kinds. The most common candlestick patterns are falling three methods, rising three methods, piercing line candlestick, shooting star candlestick, and hanging man candlestick pattern.
Definition of the Hanging Man Candlestick Pattern
The hanging man pattern comprises a single candlestick. It forms at the end of an uptrend. It indicates a bearish reversal in the uptrend, which is nearing its end. The pattern is also an indicator of the bulls losing their strength to further increase the prices and the bears returning to the market.
The pattern of the hanging man has a long shadow at the lower threshold and a small real body. It forms at the end of the uptrend and indicates weakness in further price movement. The small real body in the pattern means that the gap between the opening price and the closing price is negligible. The upper shadow does not exist. The lower shadow or wick is twice the length of its body. For traders, this is a sign to square their buy position and enter a short position.
Criteria for Identifying the Hanging Man Pattern
When traders are looking at identifying the pattern on the candlestick charts, they must keep the following points in mind:
- The real body forms at the upper end of the candlestick.
- There is no or a very small upper shadow.
- The length of the lower shadow or wick should be twice the length of the real body.
How to Trade the Hanging Man Candlestick Pattern?
Traders must observe a few characteristics of this pattern to leverage the formation of the pattern. Through the long shadow at the lower threshold, one can understand that sellers are there in the market.
Generally, the performance of the pattern of a hanging man with long lower shadows is better than a pattern with shorter lower shadows. The colour of the candlestick in this pattern can be red or green. The colour does not play an important role in comprehending the candlestick pattern.
The interpretations of the pattern and the changes expected in the market are confirmed when a bearish candle appears on the next day. To take advantage of the pattern, traders must analyse the volume. It should have increased when the pattern was formed. Traders must take a short position at the closing price of this candlestick or the opening price of the succeeding bearish candlestick.
It is a good idea to place a stop-loss at the highest point of the candlestick pattern.
Hanging Man vs Shooting Stars vs Hammers
Hammers and shooting stars are candlestick patterns similar to the hanging man pattern. They can confuse the trader in identifying the hanging man. The candlestick in hanging man appears when an uptrend is nearing its end. The same is the case for shooting stars.
The real body of the hanging man is in the upper part of the candlestick. It has a long lower shadow. Conversely, the real body of the shooting star candlestick pattern is small at the bottom end of the candlestick. It has a long upper shadow.
Also Read: Evening Star Candlestick Pattern
The hammer and hanging man formations are similar. The difference lies in what they indicate. The hammer represents a bullish reversal, whereas the hanging man represents a bearish reversal.
The hanging man pattern is a candlestick pattern. It refers to the candle’s shape and appearance, indicating a potential bearish reversal. Candlesticks represent a security’s opening, closing, high, and low prices within a specified time frame. It signifies how investors’ emotions influence prices. Two criteria must exist for the formation of the hanging man. The security must be in an uptrend. The candle must have a long lower shadow with a small real body.
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Frequently Asked Questions
The hanging man candlestick pattern is bearish. It has a small real body and a long lower shadow.
The pattern forms when the bulls push the prices upwards and are then unable to push further.
The formation of the hammer and hanging man is similar. However, the hammer is identified as a bullish reversal, whereas the hanging man is a bearish reversal. Traders see the hammer pattern on the downtrend when prices experience a rapid fall. Hammer can show strength on a single parameter of volume. But, the hanging man requires a confirmation on immediate negative close.
The hanging man candlestick pattern represents a potential reversal in an uptrend. It indicates that the investors’ interest is reducing, and they may be willing to sell the security, thereby bringing a fall in its price.
There is no specific colour for the hanging man candle. It can be either red or green. The ideal shape of a hanging man candle has a wick or tail that is twice the size of the body.