Understanding Hanging Man Candlestick Pattern and How to Trade it

What is the Hanging Man Candlestick Pattern?

When the market starts at or near its high, rises, and then closes at or near its low, it produces a bearish reversal pattern known as a hanging man that resembles a man hanging upside down. Whether the closing price was greater or lower than the starting price is shown by the colour of the candle, with black denoting the lower end and white denoting the upper end. This makes it simple to visually see whether there was a change in sentiment between open and close, which might be useful if you're keeping an eye on charts for extended periods.

A hanging man candlestick develops during an upswing when prices begin lower than and noticeably higher, but there is no true body because it gaps up from the session low. At least three of the following conditions must be met to be considered a hanging man:

• The high cost (above the most recent high)

• Having a long upper shadow denotes a lack of candle body or lower close.

• Rather than bouncing off its lows after making significant movements in either direction, it closes at or near them.

Each must occur within at least four candles of one another in an upward-going market to be considered a legitimate hanging man candlestick.

How is the Hanging Man Candlestick Pattern Recognised?

The hanging man candlestick pattern denotes the potential conclusion of a negative trend and the potential beginning of a bullish trend. The series of market occurrences must satisfy the following four criteria in order to be considered one of the hanging man candlestick patterns:

• First, a white body is required (open > close).

• Second, it must trade below its open price for the majority of its time as a white body.

• Third, it should have almost no higher wick; if there is any upper wick at all, it is more akin to "dipping" than hanging.

• Fourth, the price moving above its high would signal a bullish reversal after creating a long white body followed by a long black body (close open).

This pattern is thought to be relatively uncommon. Therefore, before considering to take any action, traders frequently wait for confirmation through different technical indicators.

What Does the Hanging Man Candlestick Tell Us?

The hanging man pattern indicates that selling pressure is increasing, which might suggest a potential reversal in the market. The hanging man candlestick is characterised by a small real body at the top of the trading range and a long lower shadow. This formation suggests that sellers are beginning to take control, even though buyers managed to push the price slightly higher by the close. The psychology behind this pattern points to a shift in momentum, hinting that the bulls may be losing their grip.

Illustrating the Hanging Man Candlestick Pattern

To illustrate how the hanging man candlestick pattern works, imagine a scenario where a stock has been rising steadily. On the chart, you notice a day where the stock opens at a certain price, drops significantly during the day, but then recovers somewhat to close near its opening price. This forms the candle hanging man, indicating a potential trend reversal. Traders often look for confirmation in the following days, such as a lower opening or a red candlestick, to validate the signal given by the hanging man pattern.

Limitations of Hanging Man Candlestick Pattern

The lack of price goals in candlesticks is one of its drawbacks. Stay in the trade as long as the downward trend persists, but exit when the price begins to increase again. Hanging man patterns exclusively provide short-term reversal indications.

The pattern is merely a mediocre predictor of a reversal if you're keeping an eye out for any hanging men. It becomes a lot better predictor if you look for particular qualities.

But there are indicators to watch out for that raise the likelihood of a price decline following a hanging man. These include selling the next day, longer shadows, and volume that is above typical. Finding hanging man candlestick patterns with all these features makes it a better indicator of a downward trend in price.

How to Trade Using the Hanging Man Pattern?

In contrast to a Doji, the hanging man design has a body. Bullish and bearish versions of the hanging man exist. When prices open higher and close lower than the previous day's price, it is called a bullish hanging man; when prices open lower and close higher than the previous day's price, it is called a bearish hanging man.

This candlestick pattern's positive interpretation denotes a lack of consensus among traders over whether to buy or sell. You may utilise bullish hanging men to time your buys when combined with additional information, such as prices breaking through resistance or declining volume. The converse is true with bearish hanging men; you can time your sales with them. Prior to entering any trades, you should always validate these patterns with additional technical analysis.

Examine price movement to previous resistance levels to spot a hanging man pattern. In an uptrending market, if you see what you think to be a clear-cut hanging man candlestick, you should search for confirmation to buy options or sell calls with confidence. Use volume indicators like open interest and put/call ratios to your advantage. Keep in mind that as erroneous signals frequently reverse, only proven patterns should serve as trade entry points. Always employ stops, and if your prediction doesn't work out as you expected, be prepared to reduce your losses.

An Overview of Technical Indicators Similar to Hanging Man

While the hanging man candlestick is a valuable tool, it's essential to differentiate it from similar patterns like the shooting star and the hammer. The shooting star, for instance, also signals a potential reversal but appears at the end of an uptrend with a long upper shadow and a small real body at the bottom. This contrasts with the candlestick hammer and hanging man, where the hammer appears at the end of a downtrend, indicating a potential bullish reversal, and the hanging man appears at the end of an uptrend, suggesting a bearish reversal. Understanding these differences is crucial for traders to apply the right strategy in the right market context.

Is There Any Timeframe to Use the Hanging Man Pattern?

The effectiveness of the hanging man candlestick pattern can vary depending on the timeframe. While it is frequently used in daily chart analysis, it can also be applied to different timeframes, such as hourly or weekly charts. However, the reliability of the signal may decrease in shorter timeframes due to the increased noise and volatility. Traders often rely on additional indicators or patterns to confirm the signal provided by the hanging man pattern before making trading decisions.

Conclusion

Understanding candlestick patterns may help you learn about the mood of the market and potential trends. You may combine the hanging man pattern with other indicators and confirmation signals to form a bearish reversal pattern. You may use it to make wise trading selections.

By understanding the subtleties of the hanging man pattern and differentiating it from other patterns, you can get an advantage in navigating the tumultuous markets. Join Kotak Securities for more details. Trade with simplicity with the Kotak stock trading platform. Simply download, register, and start trading online!