Understanding the “Hanged Man” candlestick pattern

The hanging man is a kind of candlestick pattern. Candlesticks display the highest, lowest, opening, and closing prices of a security within a specific time frame. Candlesticks reflect the impact of investor sentiment on security prices and are used by some technical traders to determine when to enter and exit transactions.

The term “hanging man” refers to the shape of the candle and what is inferred from the appearance of this pattern. The hanger represents a potential reversal in the upward trend. Although it is a risky proposal to sell assets based solely on the hanged man model, many people believe that this is the key evidence that market sentiment has begun to shift. The power of the upward trend no longer exists.

Key points

  • The Hanging Man is a type of candlestick pattern, which refers to the shape and appearance of the candle, and represents a potential reversal in an upward trend.
  • Candlesticks display the highest, lowest, opening, and closing prices of a security within a specific time frame, and reflect the impact of investor sentiment on prices.
  • When there are two criteria, there will be hangers: the asset is in an upward trend, the body of the candle is smaller, and the lower shadow is longer.

Understanding the basic candlestick chart

Hanged man explained

Hanged people will appear when there are two main criteria:

  • The asset has been on an upward trend.
  • The candle has a smaller body (the distance between the opening price and the closing price) and a longer lower shadow. There is almost no upper shadow.

Given these two criteria, when a hanger is formed in an upward trend, it indicates that the buyer has lost power. Although demand has been pushing up stock prices, there has been a lot of selling on this day. Although buyers managed to bring the price back near the opening, the initial sell-off showed that more and more investors believed that the price had peaked. For the believer of candlestick trading, this model provides an opportunity to sell a long position or even short when the price is expected to fall.

The characteristic of the Hanged Man is that there is a small “body” above the long lower shadow. The shadow below should be at least twice the length of the body.

The chart below shows two hanging man patterns in the former Facebook stock Meta (FB), both of which have caused prices to fall at least in the short term. The long-term direction of the asset is not affected, because the hanging man mode is only used to measure short-term momentum and price changes.

Although traders often rely on candlestick patterns to detect the movements of individual stocks, it is also appropriate to look for candlestick patterns in indexes such as the Standard & Poor’s 500 Index or the Dow Jones Industrial Average. Candlesticks can also be used to monitor the momentum and price movements of other asset classes (including currencies or futures).

Distinguishing feature

If it is a real hanging figure, the lower shadow should be at least twice the size of the body. In other words, traders want to see that long lower shadow line to verify that the seller is actively involved at some point during the candle formation period.

Thomas Bulkowski’s “Encyclopedia of Candlestick Charts” shows that the longer the shadow, the lower the shadow, and the more meaningful the pattern becomes. He used historical market data to study the shapes of approximately 20,000 hanged people. In most cases, those with elongated shadows are better than those with shorter shadows. Some traders will also look for strong trading volumes. Bulkowski’s research supports this view. Among the many candlesticks he analyzed, the candlesticks with larger volumes are more predictive of lower prices than candlesticks with lower volumes.

Another distinguishing feature is the appearance of a confirmation candle on the second day of the hanger’s appearance. Since the hanger suggests that the price is falling, the signal should be confirmed in the next day’s price drop. This may be due to a lower gap or the price just falling the next day (the closing price is lower than the closing price of the hanger). According to Bulkowski, this situation heralds further pricing reversals up to 70% of the time.

It is worth noting that the actual color of the hanged person is not important. The important thing is that the entity is relatively small compared to the lower shadow.

Transaction hanger

The hanging man pattern with above-average volume, long lower shadows, and a sell day is most likely to lead to lower prices. Therefore, these are ideal models used as a basis for trading.

After seeing this pattern, please consider short trading at the close of the down day The following The person who hanged himself. A more aggressive strategy is to trade close to the closing price of the hanger or close to the opening price of the next candle. Place a stop loss order above the high of the hanging candle. The chart below shows the possible entry points and stop loss positions.

One of the problems with candlesticks is that they do not provide price targets. Therefore, continue trading while the downward momentum remains unchanged, but exit when the price starts to rise again. The Hanged Man pattern is only a short-term reversal signal.

Reliability issues

If looking for any Hanged man, this model is just a mild forecast indicator of reversal.​​​ Look for specific features and it will become a better predictor. Bulkowski is one of those people who think the Hanged Man formation itself is unreliable. According to his analysis, when the hanger appears on the chart, the upward price trend will actually continue most of the time.

However, there are some things to look for, which will increase the possibility that prices will fall after listing. These include above-average volume, a longer lower shadow, and a sell-off the next day. By looking for a hanging candlestick pattern with all these characteristics, it becomes a better predictor of lower prices. Insist on trading only these strongly typed patterns.

Hanged Man vs. Meteor and Hammer

There are two other similar candlestick patterns. This may cause some confusion.

Hangers appear near the top of the upward trend, as do meteors.The difference is that the body of the hanged man is close to the top of the candlestick, and there is a long reduce shadow. Meteor has a small entity near the bottom of the candlestick, with a long superior shadow. Basically, Meteor is a hanged man upside down. In both cases, the shadow should be at least twice the height of the real body. Both indicate that prices may fall.

Both the hanger and the hammer are candlestick patterns that indicate a trend reversal. The only difference between the two is the nature of the trends in which they appear. If the pattern appears on the chart and the upward trend indicates a bearish reversal, it is called a hanger. If it appears in a downtrend that indicates a bullish reversal, it is a hammer. Apart from this key difference, the pattern and its components are the same.

Bottom line

People who hang themselves often happen. If you highlight them on the chart, you will find that most of them are bad predictors of lower prices. Look for increased volume, sell-off the next day, and longer and lower shadows and patterns become more reliable. If you want to trade, please set a stop loss above the hanger’s high.

.

READ ALSO:   Bearish pregnant woman
Share your love