Hanging Man Candlestick and Tactics

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

Image by Sabrina Jiang © Investopedia 2020

The chart shows a price decline, followed by a short-term rise in prices where a hanging man candle forms. Following the hanging man, the price drops on the next candle, providing the confirmation needed to complete the pattern. During or after the confirmation candle traders could enter short trades.

The example highlights that the hanging man doesn't need to come after a prolonged advance. Rather it can potentially mark the end of a short-term rally within a longer-term downtrend.

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.