Candlestick patterns are powerful tools that can predict the direction of market movement. These patterns can either be composed of single candlesticks or multiple candlesticks. Despite being more common, single candlestick patterns are often considered important market sentiment indicators. One such significant single-candle pattern is the hanging man.
Now, before we proceed further, it is important to note that a robust charting tool is crucial for accurately spotting and effectively analysing candlestick patterns. Here is where Samco Securities excels. With the Samco Trading App, you get TradingView charts, one of the most popular and preferred charting tools. TradingView lets you closely examine the candlestick charts of a wide range of assets and personalise their appearance according to your requirements.
That said, here is a comprehensive overview of the hanging man candlestick pattern, its visual appearance, its significance, and how to trade it effectively.
What is the Hanging Man Candlestick Pattern?
The hanging man candlestick pattern features a single candlestick and appears near the end of an uptrend. The pattern indicates a potential reversal in the trend direction from bullish to bearish. The unique name of this pattern is due to its visual appearance, which highly resembles that of a hanging man.
Types and Features of the Hanging Man Candlestick Pattern
The hanging man can be categorised into two types: a green hanging man and a red hanging man. Here is a more detailed overview of these two types along with their respective features.
Green Hanging Man
The green hanging man chart pattern is characterised by a short body at the top of the candle. The body of the candle is coloured green, which indicates that the price closed higher. The pattern often has a long lower wick, which is at least twice in length compared to the body. As far as the upper wick is concerned, the pattern either has no wick or a short wick.
Red Hanging Man
The red hanging man chart pattern, meanwhile, is highly similar to the green variant with little to no upper wick and a long lower wick that is twice as long as the body. The only difference between these two types is the colour of the body. As the name implies, the red hanging candle pattern has a red body, meaning the closing price was lower than the opening price.
Significance of the Hanging Man Candlestick Pattern
The hanging man pattern is highly significant, especially when it forms during an uptrend because it could signal a potential reversal in the market. When this pattern forms on the price charts, it often suggests that the uptrend may be losing momentum, and a downtrend could be on the horizon.
The short body of the hanging man pattern indicates indecision in the market. The long lower shadow indicates that the sellers tried to push the prices lower during the session. The little to no upper shadow indicates that the buyers tried to put up a weak resistance to the increasing selling pressure, which was ultimately overcome. Although the colour of the hanging man’s body is irrelevant, the pattern with a red body is often said to be a stronger indicator of the bearish sentiment.
How to Trade the Hanging Man Candlestick Pattern?
Trading the hanging man pattern involves identifying the right entry, stop-loss, and exit points to maximise potential gains while minimising risks. Let us look at some strategies you can use when attempting to trade this pattern.
Entry Point
The ideal point of entry for a new short position would be once the reversal is confirmed. The bearish reversal is said to be confirmed once a bearish candle forms following the hanging man candlestick.
Alternatively, if you are a more conservative trader, you could wait until the downtrend breaks through the nearest support level before initiating a new short position. Waiting for the confirmation of the reversal before initiating a trade increases the likelihood of success significantly.
Stop-Loss Point
Managing risk when trading the hanging man pattern is crucial. One of the best ways to limit losses due to unexpected adverse market movements is through stop-loss orders. The ideal point for a stop-loss order is slightly above the highest point of the hanging man candlestick pattern.
Placing the stop-loss above the hanging man ensures that minor price fluctuations due to volatility do not prematurely trigger the order. However, this placement ensures that the short position is squared off immediately, limiting the losses if the market continues to rise sharply.
Exit Point
Exiting the trade at the right time is essential to prevent losing out on the accumulated profits. The right time to exit a trade based on the hanging man candlestick is when the asset price drops down to a significant support level, where it can bounce back up. Place the exit trade just above this support level to ensure that you exit before the bounce back.
Alternatively, you can also look out for potential bullish reversal patterns in the form of candlesticks or other technical indicators like the Relative Strength Index (RSI). If the RSI moves to oversold conditions, the chances of a bullish reversal become higher. In such cases, consider exiting your position forthwith to avoid getting stuck in a losing position.
How Does the Hanging Man Candlestick Pattern Differ From the Hammer Pattern?
The hammer is another single candlestick pattern that looks visually similar to the hanging man. However, both of these patterns occur in different market contexts and signal different outcomes.
As you have already seen, the hanging man in the share market is a bearish reversal pattern that occurs during a bullish trend. It often precedes the formation of a new downtrend. In contrast, the hammer appears at the bottom of a downtrend and is a sign of a bullish reversal, where the trend moves from bearish to bullish.
Despite the similarities and differences, both the hanging candle pattern and the hammer require confirmations from subsequent candles for a more reliable signal. For the hanging man, a bearish candle confirms the switch to a new downtrend, whereas for the hammer, a bullish candle confirms the shift to a new uptrend.
Conclusion
The hanging man candlestick can be a valuable tool for traders looking to identify market reversal points and capitalise on the opportunities they provide. However, before making any trade based on such candlestick patterns, it is essential to refer to other technical indicators like RSI, Moving Average Convergence Divergence (MACD), and Average True Range (ATR), among others.
Using other technical indicators can help validate the potential market reversal and provide insights into the ideal entry, exit, and stop-loss points, all of which are crucial for maximum profitability.
If you are an options trader, Samco’s Options B.R.O. can help you build options strategies for hanging man candle trading. With Options B.R.O., you can build, research, and optimise strategies for a wide range of market conditions and assets within just a few seconds. Additionally, you can also customise the strategies to suit your risk tolerance level.
Easy & quick
Leave A Comment?