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Table of Contents
What is Hanging Man candlestick pattern?
Candlestick patterns are visual representations of price behavior, depicted through various structures, and named accordingly based on their shape. One such pattern, formed by a single candlestick, is called the Hanging Man candlestick pattern. This is a bearish trend reversal pattern that signals a potential change from an uptrend to a downtrend. This pattern is considered significant when it forms at the top of an uptrend. In appearance, it resembles a hammer. The ideal Hanging Man candlestick has a body size that constitutes 20-25% of the total candle, with the remaining part forming the lower shadow and little to no upper shadow. Although the color of this candle doesn’t matter, if it is red, it tends to be more reliable.How Hanging Man candlestick pattern forms?
The Hanging Man candlestick pattern forms when buyers lose control and sellers gain it. As the session begins, there is a significant drop in price, leading to the formation of a long lower shadow. As the session continues, buyers attempt to regain their strength by pushing the price upward. They succeed to some extent, but not enough to overcome the sellers, and the price closes below the opening level, creating a bearish (red) candle. In the case of a small upper shadow forming, the price fluctuates slightly to the upside at the beginning of the session. The same thing happens with a bullish (green) Hanging Man candlestick pattern. The price opens at a certain level, then drops significantly, creating a long lower shadow. Again, buyers try to push the price higher. In this scenario, they succeed in taking the price above the opening level but drop slightly, forming a small upper shadow. This is how a red or green Hanging Man candlestick pattern forms.Psychology behind the formation of Hanging Man candlestick pattern
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How to identify Hanging Man candlestick pattern?
It is very important to understand the defining features or key characteristics of the Hanging Man candlestick pattern and its context within the market before identifying it on the chart. It is a single candlestick pattern (made up of just one figure) characterized by a small real body that constitutes 20-25% of the overall size of the candlestick. The remaining part is known as the lower shadow, which constitutes 70-75% of the overall size of the candlestick. Ultimately, the size of the lower wick is approximately three times the size of the body, and there is little to no upper wick. Although the color doesn’t play a significant role, if it is red, it is considered more reliable. This pattern typically occurs after a prolonged uptrend; although it can occur during the continuation of a trend, it is not as reliable as when it forms at the top of an uptrend. There is a higher probability of encountering the Hanging Man candle at a key resistance level, as it is a trend reversal pattern that reverses an uptrend into a downtrend. Therefore, to accurately and reliably identify the pattern, ensure the conditions include a prolonged uptrend, all the characteristic features of the pattern, and confirmation of its formation supported by an increase in volume.How to trade the Hanging Man candlestick pattern effectively?
For instance, suppose a stock has been in a continuous uptrend for several days, and the price has risen by 10% during that period. Suddenly, on Wednesday, a Hanging Man candlestick pattern appears with a small body near the top of the day’s range and a long lower wick, indicating that sellers entered the market but couldn’t overpower the buyers yet. On the next trading day, the price opens lower and forms a bearish candle, signaling that sellers are gaining momentum. Additionally, the 50-day moving average is far below the current market price, indicating an overbought condition, with the RSI above 70 reinforcing this condition. All these indications confirm that the uptrend is likely to exhaust and that sellers are actively participating in the market.
At this point, the trader can enter a short position, placing a stop loss slightly above the high of the Hanging Man candle to protect against potential false signals. The trader might set a profit target based on a 1:3 risk-to-reward ratio, meaning that for every dollar risked, they aim to gain three dollars. Alternatively, the trader can use a trailing stop loss to lock in profits. This approach balances the requirements of confirmation, risk management, and potential profit-taking, ensuring that the trade is well-rounded and strategic based on the Hanging Man candlestick pattern.
Conditions where the accuracy of Hanging Man candlestick pattern is high
To improve the accuracy of trading the Hanging Man candlestick pattern, certain conditions should be fulfilled that strengthen the signal and increase the probability of successful trades.Here are some conditions that significantly improve the accuracy of this pattern:
1. Formation of the Hanging Man Candlestick Pattern After a Prolonged Uptrend:
Since the Hanging Man candlestick pattern is a bearish trend reversal pattern that reverses an uptrend into a downtrend, it is crucial for this pattern to form at the top of the uptrend. This formation indicates the entry of sellers and the exhaustion of the current uptrend. Therefore, it is important for the pattern to appear after a sustainable uptrend.
2. High Trading Volume During the Formation of This Pattern:
Volume is a key component in determining the strength of any candlestick pattern. In the case of the Hanging Man, when it forms on higher volume, it indicates a strong battle between buyers and sellers and suggests that more participants are involved in that session, which helps in identifying traps or weak patterns. Higher volume reinforces the idea that the pattern is a genuine signal of a reversal, rather than a temporary pullback. On the other hand, low volume indicates weaker conviction, making the pattern less reliable.
3. Bearish Confirmation in the Following Candlestick Pattern:
After the formation of the Hanging Man, it is highly important to confirm the ongoing trend with a red (bearish) candle immediately following the Hanging Man, as this greatly enhances the pattern's accuracy. This follow-up candlestick indicates that sellers have genuinely gained control of the price and are driving it lower. It is important because the Hanging Man alone may only show that sellers participated in the session but did not overpower the buyers, potentially resulting in a false signal or a temporary pause in the ongoing uptrend. To address this scenario, it is crucial to have a bearish confirmation, which validates that sellers are not just interrupting the trend but are actively reversing it.
4. Appearance of This Pattern at Key Resistance Levels:
A Hanging Man candlestick pattern that forms at a key resistance level, such as a previous high or a psychological price point, can provide a more accurate signal. Resistance levels are areas where selling pressure has historically increased and the market has struggled to move higher. If the Hanging Man forms near such levels, it suggests that the bulls are struggling to break past resistance but ultimately fail if this pattern appears. The formation of this pattern at a resistance level adds more weight to the confirmation and increases the chances of successful trades.
Conditions where this patten may fails
While this pattern is reliable, there are certain circumstances or conditions where its accuracy may be compromised, leading to potentially misleading signals. Being aware of these conditions helps traders avoid potential pitfalls.Here are some primary scenarios where the Hanging Man candlestick pattern may fail:
1. Lack of Clear Uptrend:
The efficiency of the Hanging Man candlestick pattern is greatly enhanced when it forms after a well-defined, sustained uptrend. Conversely, if this pattern appears during a consolidation phase or a sideways market condition, it is likely to provide a false signal. Without a proper and strong prior uptrend, the pattern loses its significance, and the potential reversal becomes questionable. Therefore, traders should always look for a clear uptrend before interpreting the Hanging Man as a bearish signal.
2. No Bearish Confirmation:
A common reason for false signals with this pattern is the lack of a bearish confirmation candle following the Hanging Man. The Hanging Man alone only indicates that sellers have entered the market during the session but does not guarantee a trend reversal unless followed by a bearish candlestick. If the candlestick immediately after the Hanging Man is neutral or bullish, it suggests that sellers have not yet dominated the buyers, and the buyers are still in control. This may indicate that the pattern will not lead to a downward move. Entering a short position without confirmation can be like making a premature entry, increasing the risk of hitting the stop-loss.
3. Low Trading Volume:
The pattern is more likely to be false when it forms on low trading volume. Low trading volume indicates that fewer buyers and sellers are actively participating in the market, leading to temporary price fluctuations rather than a strong reversal signal. A low-volume Hanging Man might be caused by minor market participants or retail traders, and without the involvement of significant players like institutional investors, the trend is unlikely to reverse. Traders should always check the volume to ensure there is sufficient market interest.
4. Strong Fundamental Bullish Sentiment:
When strong fundamental factors drive the price higher in the market (e.g., positive earnings reports, economic growth, or significant news events), the Hanging Man pattern may fail to reverse the trend. Even if the pattern meets the required conditions, external factors can overpower technical signals, leading to a continued rise in price despite what appears to be a bearish signal on the chart. In such scenarios, relying solely on the Hanging Man can be misleading.
5. Formation of This Pattern at Support Levels:
The Hanging Man candlestick pattern is a trend reversal pattern that typically reverses an uptrend into a downtrend. It is most effective when it forms at the top of an uptrend, usually at a resistance level. At resistance levels, there are often multiple active short positions, making it more difficult for the price to break through. Therefore, when the Hanging Man forms at a support level instead of a resistance level, it is more likely to generate a false signal. Support levels are not ideal for this pattern to reverse the uptrend.
6. Divergence in Technical Indicators:
Technical indicators are crucial for strengthening the efficiency of the Hanging Man candlestick pattern. If there is divergence between the price action and the signals from technical indicators, additional confirmation is needed. Divergence between technical parameters and price action can weaken the pattern and result in false signals.
Difference between Hanging Man and Hammer candlestick pattern
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Hanging Man candlstick pattern
The Hanging Man is a bearish trend reversal candlestick pattern that converts an uptrend into a downtrend. This pattern plays a significant role when it forms at the top of an uptrend. Although the color of the pattern does not have considerable importance—it could be green or red—a red Hanging Man is generally considered a more reliable signal. When the formation of this pattern is confirmed by other factors such as volume and positive signals from technical parameters, it yields impressive results. The accuracy of this pattern is estimated at 60-70% when used with additional confirmation.
Hammer candlestick pattern
In appearance, the Hammer candlestick pattern is similar to the Hanging Man. In this case, the color of the pattern does not play a significant role, but if it is green, it becomes more reliable. The Hammer candlestick pattern forms at the end of a downtrend and reverses the downtrend into an uptrend. It is a popular and powerful pattern, with its accuracy being considerable when used in conjunction with other directional parameters. The accuracy level of this pattern is also estimated at 60-70%. The key difference between the Hanging Man and the Hammer candlestick pattern lies in their formation positions: the Hanging Man appears at the top of an uptrend, while the Hammer appears at the bottom of a downtrend. The remaining characteristics of both patterns are almost identical.
Frequently Asked Questions
➢ Yes, the color of the Hanging Man candlestick pattern does not play a significant role; it can be green or red. However, a red Hanging Man is generally considered a more reliable signal.
What is the best time frame to trade the Hanging Man candlestick pattern effectively?
➢ The Hanging Man candlestick pattern can be effective across various time frames. Whether it appears on smaller time frames such as 1-minute, 5-minute, or 15-minute charts, or on longer time frames like hourly, daily, weekly, or monthly charts, its accuracy remains consistent.
What are the conditions where the accuracy of this pattern is high?
➢ The accuracy of the Hanging Man pattern is significantly enhanced under certain conditions, such as:Increased trading volume during the formation of the pattern.
Appearance at a key resistance level.
Confirmation from technical indicators showing selling pressure.
What are the conditions where this pattern might fail?
➢ The Hanging Man pattern, like any indicator, does not guarantee a directional move and may sometimes fail under specific conditions. Possible scenarios where the pattern might be less accurate include:
Market consolidation or sideways conditions.
Formation at inappropriate positions.
Divergence between technical indicators and price action.
Formation at inappropriate positions.
Divergence between technical indicators and price action.
