What is a Hanging Man Pattern?
A Hanging Man is a type of bearish reversal pattern, made up of just one candle. It has a long lower wick and a short body at the top of the candlestick with little to no upper wick.
What does the Hanging Man Pattern Signal?
The hanging man is an extremely helpful candlestick pattern to help traders visually see where resistance is located. After an uptrend, the hanging man can signal to traders that the uptrend could be over and that short positions could potentially be covered.
- They can act as leading indicators to identify shifts in bullish or bearish momentum
- Hanging man patterns tend to be highly effective when three or more increasing candles precede them. When the completed patterns emerge, they can confirm or negate that a potential significant high or low has been reached, helping traders enter and exit positions accordingly.
- The larger the bottom wick length, the greater is the strength of the pattern. This has to continue within an acceptable time frame.
A hanging man pattern appears after an asset has been increasing in price, which suggests the market is aiming to form a top.
Hanging man candlesticks signal a potential top, followed by an immediate price decline to indicate a reversal in the market. This happens all during the one time frame, where the value of the asset falls after the open but then pulls itself together to close near the open.
A hanging man pattern should emulate the letter “T” in the candlestick and appears on all time frames, including everything from a monthly chart down to a one-minute. All hanging man candlesticks are the same, but the bigger the time frame the hanging man is on, the stronger the reversal to the upside.
Trading Hanging Man Patterns
Depending on the formation of previous trends, hanging man patterns can often actually be hammers patterns or shooting stars. Typically, hanging man patterns come after a wave of buying and tend to be bearish indicators. But, hanging man patterns form after an aggressive buying wave. Hanging mans can also sometimes be confused with Doji candlesticks. Doji actually indicates indecision since it contains both upper and lower shadows.
Traders could look for hanging mans to pull back towards a significant support level on the chart. When this occurs in isolation, with no support to the left, traders prefer not acting upon it. In these cases, traders may wait for a daily close to see if a price reversal takes place.
Technical Analysts also suggest that the pattern becomes more reliable when it is greater than the trading range of prior candles over the period of the last couple of days. Volume is also an important factor to consider. If trade volume has increased from the prior session, it could indicate rising interest in the asset, at the current price level.
Looking at the daily time frame of WKHS (Workhorse Group Inc.) we can see a pretty evident hanging man pattern that formed at the local high, signaling a top in the market and a potential reversal. The original move spiked up from $6 to just a little above $30, before painting the hanging man on the daily, indicating a reversal in the market. From this candlestick pattern, the price dipped from $30 to about $16, or almost 50%.
Looking at the daily time frame of ETH (Ethereum) on the 2017 cryptocurrency bull run highs, we can see the absolute top trading price of ETH was signaled by a hanging man before starting its descend into a 2-year long bear market. The high point reached was just under $1400 before the hanging man candlestick pattern was painted and dropped the price all the way down to $400.
Differences Between the Hammer and Hanging Man Pattern
Although there are three criteria that show similarities between the two, there are also three aspects that differentiate the hanging man from the hammer: trend, extent of the move before the candle line, and confirmation.
- Trend: A hammer must come after a decline: A hanging man from the hammer must come after a rally.
- Extent of the move before the candle line: A hammer is valid even if it comes after a short-term decline, but a hanging man should emerge after an extended rally, preferably at an all-time high.
- Confirmation: As will be addressed later, a hanging man should be confirmed, while a hammer doesn’t need to be.
The longer the lower wick, the shorter the upper wick; the smaller the real body, the more meaningful the bullish hammer or bearish hanging man.
Limitations of the Hanging Man Candlestick Pattern
There is no confirmation the cost will keep on moving to the downside following the confirmation candle. A long-wicked hanging man and a strong confirmation candle may push the price very low within two periods. This may not be an ideal spot to purchase as the stop-loss might be a huge span away from the entry point, exposing the trader to risk which doesn’t justify the potential reward.
