Hanging Man Candlestick Definition and Tactics (2024)

What is a Hanging Man Candlestick?

A hanging man candlestick occurs during an uptrend and warns that prices may start falling. The candle is composed of a small real body, a long lower shadow, and little or no upper shadow. The hanging man shows that selling interest is starting to increase. In order for the pattern to be valid, the candle following the hanging man must see the price of the asset decline.

What Does the Hanging Man Candlestick Tell You?

A hanging man represents a large sell-off after the open which sends the price plunging, but then buyers push the price back up to near the opening price. Traders view a hanging man as a sign that the bulls are beginning to lose control and that the asset may soon enter a downtrend.

The hanging man pattern occurs after the price has been moving higher for at least a few candlesticks. This does not need to be a major advance. It may be, but the pattern can also occur within a short-term rise amidst a larger downtrend.

The hanging man looks like a "T", although the appearance of the candle is only a warning and not necessarily a reason to act.

The hanging man pattern is not confirmed unless the price falls the next period or shortly after. After the hanging man, the price should not close above the high price of the hanging man candle, as that signals another price advance potentially. If the price falls following the hanging man, that confirms the pattern and candlestick traders use it as a signal to exit long positions or enter short positions.

If entering a new short position after the hanging man has been confirmed, a stop loss can be placed above the high of the hanging man candle.

The hanging man, and candlesticks in general, are not often used in isolation. Rather they are used in conjunction with other forms of analysis, such as price or trend analysis, or technical indicators.

Hanging men occur on all time frames, from one-minute charts right up to weekly and monthly charts.

Example of How to Use a Hanging Man Candlestick

In the daily chart of Amgen Inc. (AMGN), a compelling example of a hanging man candlestick pattern was observed, marking a significant moment in its trading behavior. After a robust rally of 33% from its September 2022 low, AMGN reached a peak in November 2022. This uptrend was followed by a period of consolidation, during which the hanging man pattern materialized, signaling a potential shift in market sentiment.

Traders adept in utilizing this pattern would typically initiate a position at the market's opening following the appearance of the hanging man, setting a stop loss at the recent high to manage risk. In the AMGN scenario, this strategy involved placing the stop loss at $296.67. To adhere to a risk-reward ratio of 2:1, a limit order for exiting the position would be set. For AGN in this case this exit point was established at $263.07, with the trade commencing at an opening price of $285.55. Notably, this particular trade on ANGN proved successful within a span of 21 trading days.

It is crucial to understand that such examples serve as illustrations only. Traders commonly rely on extensive backtesting and scenario analyses across various securities before executing trades based on signals like these. The hanging man pattern, while indicative, is not a standalone predictor and is best utilized in conjunction with comprehensive security and market analysis and risk management strategies.

The Difference Between the Hanging Man and Hammer Candlesticks

The hanging man and the hammer candlesticks look identical. The only difference is the context. The hammer is a bottoming pattern that forms after a price decline. The hammer-shape shows strong selling during the period, but by the close the buyers have regained control. This signals a possible bottom is near and the price could start heading higher if confirmed by upward movement on the following candle. The hanging man occurs after a price advance and warns of potentially lower prices to come.

Limitations of Using the Hanging Man Candlestick

One of the limitations of the hanging man, and many candlestick patterns, is that waiting for confirmation can result in a poor entry point. The price can move so quickly within the two periods that the potential reward from the trade may no longer justify the risk.

The reward can also be hard to quantify at the start of the trade since candlestick patterns don't typically provide profit targets. Instead, traders need to use other candlesticks patterns or trading strategies to exit any trade that is initiated via the hanging man pattern.

There is also no assurance the price will decline after a hanging man forms, even if there is a confirmation candle. This is why placing a stop loss, to control risk, above the high of the hanging man is recommend when a short trade is initiated.

The Bottom Line

The hanging man candlestick is a significant pattern in technical analysis, characterized by a small body located at the top of the trading range with a long lower shadow and little to no upper shadow. This pattern typically emerges at the peak of an uptrend, signaling potential bearish reversal. Its recognition is crucial as it suggests that despite the buyers' initial control during the session, sellers gained ground, pushing prices lower, before a close near the open. However, the pattern alone is not a definitive indicator of a trend reversal; it requires confirmation through subsequent bearish price action or increased selling volume.

In employing tactics with the hanging man pattern, traders should integrate it with other technical tools for a more robust analysis. This includes utilizing moving averages to gauge the prevailing trend, and applying momentum indicators like the Relative Strength Index (RSI) or Stochastic Oscillator to assess market conditions. Additionally, considering support and resistance levels can provide contextual insight, enhancing the predictive power of the Hanging Man pattern. As with all trading strategies, it is vital to incorporate sound risk management practices, including setting appropriate stop loss orders, to mitigate potential losses in case the anticipated trend reversal does not materialize.