The Hanging Man Candlestick Pattern appears in an uptrend. It represents a bearish pattern with a drop in price.
The Pattern consists of a small body with a long lower wick and a little or no upper wick. It looks similar to alphabet T.
What is the Hanging Man Candlestick Pattern?
The Hanging Man describes that the bulls are losing control, and the market is declining, showing the dominance of bears.
Its long lower wick shows a significant sell-off, which pushes the price downwards before the buyers push the price closer to the opening levels.
Thomas Bulkowski, in his book Encyclopedia of Chart Patterns, mentioned that longer the lower wick of a candle, the more effective the pattern becomes.
Although the Hanging Man defines a bearish pattern, the candle itself can be bullish or bearish. But, a bearish candle provides better identification of a downward market.
Here’s what the Hanging Man looks like on a chart:
Notice there is a confirmation candle next to the Hanging Man. This confirmation candle, along with the Hanging Man, can signify a drop in price. If there is no confirmation candle, then we may want to refrain from trading the Hanging Man.
Some traders confuse the Hanging Man with the Shooting Star Candlestick Pattern and Hammer Candlestick Pattern. The Shooting Star is an inverse of the Hanging Man. It emerges in an uptrend and has a long upper wick with a little or no lower wick. The Hammer has a long lower wick, but it appears in a downtrend.
The Hanging Man and the Shooting Star is a bearish pattern while the Hammer represents a bullish pattern.
The Hanging Man can occur on all timeframes from one-minute to monthly charts. Also, it can frequently surface on the forex charts.
How to trade the Hanging Man Candlestick Pattern?
The Hanging Man only gives short-term reversals, so we need to trade the Pattern carefully. When traders see the candlestick, they may consider to go short and place a stop-loss near its high, then exit when the price rises.
As the Hanging Man doesn’t give price targets, it is up to the trader and their own money management strategy to exit the trade when the price moves up.
When trading the Hanging Man, we need to remember that it is a short-term predictor of a reversal and thus can use it as part of a reversal trading strategy.
Bulkowski suggested that the Hanging Man itself is unreliable as the upward price movement continued for a short time after the appearance of the Hanging Man. Besides this, there is no certainty that the price will go down after the Hanging Man shows up on the chart. Therefore, you need to place the stop-loss above the high of the Hanging Man to control risks.
Authentic signals are used in conjunction with momentum oscillators like the RSI and Stochastic Oscillator for oversold conditions.
Hanging Man Candlestick Pattern trading strategy
Most traders use multiple timeframe analysis for trading the Hanging Man Candlestick Pattern. This means we could look for the Pattern on a longer timeframe and then determine the entry point on a shorter timeframe.
As the Pattern is bearish, it primarily provides sell signals.
Hanging Man Candlestick Pattern sell strategy
- Look for the confirmation candle next to the Hanging Man.
- Wait for the price bar to go bearish before entry.
- Place a stop-loss near the recent high from the Hanging Man.
- Exit the trade when the price moves higher.
Hanging Man Candlestick Pattern Conclusion
The Hanging Man Candlestick Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. The Hanging Man Candlestick Pattern comes up frequently on the charts and is a limited interpreter of a price reversal.
I would prefer to use the majority of candlestick patterns such as the Hanging Man Candlestick Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
The Hanging Man Candlestick Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Hanging Man Candlestick Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Hanging Man Candlestick Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.