What is Hanging Man Candlestick Pattern: Meaning, Uses, Differences & Example

Hanging Man Candlestick Pattern: Explained

Before learning about the hanging man candlestick pattern,  If you are unfamiliar with reversal patterns, then you just need to know that reversal patterns indicate the end of the ongoing trend and the beginning of the opposite trend. So similar to this pattern, the Hanging Man Candlestick pattern is a bearish reversal pattern that typically forms at the end of an uptrend. Meaning the emergence of a hanging man signifies a potential trend reversal—the end of an uptrend and the start of a downtrend. 

Since it signifies a potential trend reversal, it warrants caution among traders. At the same time, it also signals potential shorting opportunities for short sellers. This pattern is recognized by a single candlestick with a small body and a long lower wick, which is at least twice the length of the body. The upper wick, if present, is usually short or nonexistent.

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What is Hanging Man Candlestick Pattern?

If you are unfamiliar with reversal patterns, then you just need to know that reversal patterns indicate the end of the ongoing trend and the beginning of the opposite trend. So we have to define this pattern in a sentence: the Hanging Man Candlestick pattern is a bearish reversal pattern that typically forms at the end of an uptrend. Meaning the emergence of a hanging man signifies a potential trend reversal—the end of an uptrend and the start of a downtrend. 

Since it signifies a potential trend reversal, it warrants caution among traders. At the same time, it also signals potential shorting opportunities for short sellers. This pattern is recognised by a single candlestick with a small body and a long lower wick, which is at least twice the length of the body. The upper wick, if present, is usually short or nonexistent.

Characteristics of the Hanging Man Candlestick Pattern

A Hanging Man pattern contains the following characteristics mentioned below; but first, know that you must see the below mentioned features on a candlestick that forms in an uptrend, or else the pattern is not a Hanging Man pattern. 

Body: The body of the candlestick is small and located near the lower end of the trading range. It can be red or green—although it is generally red—depending on the market's closing price. The tiny body indicates indecisiveness between buyers and sellers.

Lower Wick: The lower wick (shadow) extends beneath the body and represents the lowest price traded during the session. It is typically twice the length of the body; that said, it is common to see wicks that are more than twice the length of the body. The long lower wick signifies that sellers or bears pushed the price significantly lower during the session.

Upper Wick: While the Hanging Man usually lacks an upper wick (shadow), a tiny upper wick may occasionally be present. The absence of a significant upper wick suggests a lack of buying pressure and reinforces the bearish sentiment.

Example of Hanging Man Candlestick Pattern

To further understand the example of hanging man candlestick pattern in stock market, you can evaluate the example with the particular asset.

Stock XYZ

Open price: Rs.50

High: Rs.52

Low: Rs 49

Close: Rs 50.10

As you observed the stock chart for the following securities, here the small and located at the upper end of the overall price range of the day.

The upper shadow is long, usually considered at least twice the size of the real body. And the lower shadow which is the difference between the real body’s bottom and the low which is very short. 

To visualise the Hanging Man candlestick refer this diagram:

                  High

                   /\

                  /  \

  Open --> /    \ <-- Close

                /      \

   Low --------> --------> --------> --------> -------→

From the reference, the hanging man candlestick pattern has a small real body, which indicates the difference between the open and close prices. And the pattern position near the high of the day.

In the following example you can identify the bullish trend is weakening and the bear's trend might take the control which shows a potential reversal. You can also consider other technical indicators before making any trading decisions in the stock market.

How to Trade Using the Hanging Man Candlestick Pattern?

The Hanging Man pattern—is a bearish reversal pattern—and hence is a potential signal for traders to consider exiting long positions or building short trades. However, before making trading decisions, it is essential to exercise caution and rely on confirmation from other technical indicators. That is because no technical pattern is foolproof. Moving on, while trading the Hanging Man pattern, keep the following points in mind:

Since candlestick patterns are not foolproof, traders may wait for confirmation in the form of a bearish candlestick or a lower close in the following sessions. Consider not selling all your positions or deploying all your capital to short an asset just because you see a Hanging Man candlestick. You could also combine it with other indicators to increase its reliability. 

For example, trading volume analysis might provide extra information. Higher volume during the creation of the Hanging Man signifies higher significance and reinforces the possibility of a trend reversal. That is because high value indicates high trading activity—in this case, a strong presence of active selling pressure. 

Likewise, even look out for support and resistance levels. A hanging Man pattern occurs near a strong resistance level, it strengthens the bearish signal. Conversely, if it forms near a strong support level, the significance of the pattern may diminish, and additional confirmation becomes crucial.

Difference Between Hanging Man, Shooting Stars, and Hammers

The Hanging Man candlestick pattern is often confused with the Shooting Star and Hammer patterns. While these patterns share some similarities, they have distinct characteristics that traders must be aware of:

Shooting Star: The Shooting Star is also a bearish reversal pattern, and similar to the Hanging Man, the shooting star appears during an uptrend and requires confirmation for a valid signal. However, it is characterised by a small body near the low end of the trading range and a long upper wick, as opposed to a small body at the top and long lower wick of the Hanging Man.  

Hammer: On the other hand, the Hammer resembles the Hanging Man, as it has a small body near the high end of the trading range and a long lower wick. However, the key difference between is that—the hammer is a bullish reversal pattern that emerges at the end of a downtrend. The hammer indicates a potential bullish trend reversal to the upside and requires confirmation for a valid signal. It suggests that buyers are stepping in and can be an opportunity for long trades.

It is important for traders to understand the distinctions between these patterns to avoid misinterpreting signals and making incorrect trading decisions. While the Hanging Man, shooting star, and hammer share similarities in terms of their body size and long wicks, their positions within the trend and the subsequent confirmation required differ significantly.

Conclusion

Understanding candlestick patterns can provide useful information about market sentiment and future trends. The Hanging Man pattern is a bearish reversal pattern that you can use in conjunction with other indications and confirmation signals. It will help you make prudent trading decisions. 

You can have an edge in navigating the volatile markets by knowing the complexities of the Hanging Man pattern and distinguishing it from similar patterns. For more information you can join blinkX. Trade with ease through blinkX stock trading app, just download, sign-up and begin your online trading.