You must have heard of the hanging man candlestick pattern. It is quite famous due to its unique name. Well, not only the name but the pattern itself very unique. You can identify potential opportunities just by learning this candlestick pattern.
So what are you waiting for? In this Market Investopedia blog, we will discuss all you need to know about the hanging man pattern. So let’s get started with a short overview.
What is a hanging man?
A hanging man is a technical analysis pattern that forms a similar formation to a hanging man structure. It’s a bearish reversal pattern that occurs during an uptrend and suggests a trend reversal.
The pattern forms when the price opens higher than the previous day’s close. However, it started declining, indicating a shift from an uptrend to a downtrend.
Components of Hanging Man
Trend: Hanging man generally appears during an uptrend.
Shape: A hanging man candle appears at the top of the uptrend. It is a small, hanging, man-like structure with a small real body, no upper shadow, and a long lower shadow.
Lower Shadow: The lower shadow should be at least double the hanging man candle body. The length of lower wicks is an indication of the bearish trend reversal.
How to Trade Hanging Man
Struggling to use the hanging man candle pattern? Wait, here is a step-by-step guide for trading this pattern to help you out:
A quick glance
A hanging man indicates a trend reversal from uptrend to downtrend.
A hanging man is a technical analysis charting pattern that indicates a bearish reversal.
A hanging man accompanied by high volume confirms the pattern. You can also use Bollinger bands, rsi and other indicators for further confirmation.
Price action trading involves watching chart patterns to make trade decisions based on historical price movements. Meanwhile, SMC involves watching charts to ascertain the impact of market makers’ activities and making trade decisions accordingly.
Watch the Trend
The first step is to open a chart of the instrument you want to trade. Once you have opened a chart, identify the overall trend over a period. It can be bullish, bearish or sideways. As the hanging man appears on the bullish trends, watch for rising candles.
Identify the Hanging Man Candle
Watch for the hanging man candlestick pattern once you have identified an uptrend. Look for a small bearish candle with a small body, no upper wick, and a long lower wick.
Confirm the pattern
Confirmation is a must when trading hanging man or any other charting pattern. Firstly, watch for volume; a hanging pattern accompanied by high volume confirms the pattern. Secondly, a lower wick double the size of the hanging man candle also confirms it.
Combined with other Indicators
Solely making a trade decision based on a hanging pattern may not be a great idea. Combine the indicator with indicators such as moving averages, Bollinger bands, RSI, oscillators, and others for effective results.
Place Trade
A hanging pattern suggests a bearish trend reversal. So, after confirmation, if you are satisfied with the strength of the pattern, you can go ahead and place trades. You can open a short position, expecting the price to fall. Always set proper stop loss and take profit level to get the desired results.
Advantages of Hanging Man Candlestick Pattern
Trade any asset in any time frame: You can use the technical analysis pattern to trade any asset, including forex, commodities, stocks, indices, and others. Also, the hanging man pattern will help you identify both short-term and long-term opportunities.
Easy to Identify: When you hear the word hanging man, your brain forms an image that depicts the hanging man. You just need to look for a similar structure on the chart. So remembering, spotting, and even interpreting patterns is quite easy.
Multiple Ways to Trade: The best part about the hanging man pattern is you can trade it in many ways. Firstly you can combine it with any top technical analysis indicators. Secondly, you can even use it in combination with candlestick patterns.
Limitations of Hanging Man Candlestick Pattern
Unclear Information: The hanging man pattern suggests a potential for a price fall and tells the direction of trade. However, it does not tell the exact point of when to enter or exit a trade or the stop loss levels.
Not a Guarantee of Bearish Reversal: Hanging man candle generally suggests a potential for a bearish reversal. But it does not give any guarantee. Also, in some cases, it even indicates indecision in the market.
Not Suitable for Volatile Market: The trading market changes in global geopolitical and economic conditions. Thus, it may serve as a vague tool during unexpected market upturns and sudden price swings.
Conclusion
A hanging man pattern is a great tool that can help you identify bearish trading opportunities. However there are numerous other chart patterns similar to hanging man. It means that you cannot make your strategy solely based on the pattern.
So if you want to become a technical analysis trader, then learn about different patterns and indicators. You can even seek help from Market Investopedia’s in-depth educational resources. You can refer to our blog section to learn about different candlestick patterns. Also, you can subscribe to technical analysis-based resources. Join us and take a step toward your successful trading journey.
