In this guide to understanding the Hanging Man Candlestick Pattern, we’ll show you what this chart looks like, explain its components, teach you how to interpret it with an example, and discuss its limitations.
What Is the Hanging Man Candlestick Pattern?
The Hanging Man candlestick pattern, as one could predict from the name, is viewed as a bearish reversal pattern. This pattern occurs mainly at the top of uptrends and can act as a warning of a potential reversal downward.
What happens on the next day after the Hanging Man pattern is what gives traders an idea as to whether or not prices will go higher or lower.
It is important to emphasize that the Hanging Man pattern is a warning of potential price change, not a signal, by itself, to go short.
What Does the Hanging Man Pattern Look Like?
The Hanging Man formation, like the Hammer, is created when the open, high, and close prices are roughly the same. Also, there is a long lower shadow, which should be at least twice the length of the real body.
Red vs Green Hanging Man
When the high and the open are the same, a red bearish Hanging Man candlestick is formed. This pattern is considered a stronger bearish sign than when the high and close are the same, forming a green Hanging Man.
Although the green Hanging Man is still bearish, it’s considered to be less so because the day closed with gains.
Why Is a Hanging Man Pattern Bearish?
After a long uptrend, the formation of a Hanging Man is bearish because prices hesitated by dropping significantly during the day.
Granted, buyers came back into the stock, future, or currency and pushed prices back near the open. However, the fact that prices fell significantly shows that the bears are testing the resolve of the bulls.
Hanging Man vs Hammer Candlestick Patterns
The primary difference between the Hanging Man pattern and the Hammer Candlestick pattern is that the former is bullish and the latter is bearish. That’s because the Hanging Man appears at the top of uptrends while the Hammer appears at the bottom of downtrends.
What Does a Hanging Man Candlestick Mean?
Chart 2 below of Alcoa (AA) stock illustrates a Hanging Man. The large red bearish candle after the Hanging Man strengthens the bears thinking that a downward reversal is coming:
In Chart 2, the market began the day testing to find where demand would enter the market. Alcoa’s stock price eventually found support at the low of the day. The bears’ excursion downward was halted and prices ended the day slightly above the close.
Confirmation that the uptrend was in trouble occurred when Alcoa gapped down the next day and continued downward creating a large bearish red candle.
How to Trade on a Hanging Man Candlestick
To some traders, the next day’s confirmation candle, plus the fact that the upward trendline support was broken, gave a potential signal to go short.
It is important to repeat that the Hanging Man formation is not the sign to potentially go short; other indicators such as a trendline break or confirmation candle should be used to determine sell signals.
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Below we answer some common questions about Hanging Man Candlestick patterns.
Which candlestick pattern is most reliable?
According to the book Encyclopedia of Candlestick Charts by Thomas Bulkowski, the Evening Star Candlestick has a 72% chance of accurately predicting a downtrend. The Evening Star is a bearish reversal pattern that occurs at the top of an uptrend. It is a 3-day pattern composed of a large bullish candle on day 1, a small candle on day 2, and a large bearish candle on day 3.
What does a red hammer candlestick mean?
A red Hammer candlestick pattern at the bottom of a downtrend is a bullish signal that a possible uptrend may occur. The red signifies that the asset’s price dropped during the trading day. However, the Hammer portion of the candlestick, with its long lower shadow, suggests that bulls were able to counteract bears, even though they were not able to bring the price back up to the opening price.
Learn more about technical analysis indicators, concepts, and strategies including:
- Inverted Hammer
- Shooting Star
- Dragonfly Doji
- Candlestick Basics
- Moving Averages
- Average Directional Movement.