How to trade Hanging Man Candlesticks with Example: FKnol.com

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The frequently occurring hanging man candlestick is another pattern that accompanies the similarly-shaped Hammer Candlestick Pattern. The only difference between the two is that the hanging man forms on the uptrend and leads to a possible downtrend, while the hammer is formed on a downtrend and leads to a possible uptrend. Nevertheless, both these patterns are closely tracked by the market participants for price reversals.
While the hanging man also looks exactly like the hammer, since it is formed on the uptrend (that is - the upper side), it is called the hanging man as it represents a person being hanged. The body of the candle represents the face of the hanging man, while the long lower wick (shadow) represents the hanging body of the man.
On the price charts, a hanging man appears as a single-line pattern - that is, it is made of only one candle which may be red or green - the color of the candle does not matter. When formed on an uptrend, it indicates a possibility of price reversal - that is, the prices may decline after the hanging man pattern is formed on an upward price movement.
Most of the active traders often wait for the next confirmation candle to form before taking a position on a hanging-man-based candlestick pattern. When formed on a uptrend, the confirmation candle should be red in color representing the price reversal to the downward direction. This article explains the details of how the hanging man candlestick is formed, what market conditions are indicated by its formation, how to trade the hanging man candlestick, and the article also covers the most recent examples of the same. To understand the working and trading of the hanging man candlestick, let's start by checking the factors needed for its formation.

Construction of the Hanging Man Candlestick

Being a single line pattern, it be tempting to jump into the trade on seeing the hanging man pattern formed on the price charts. However, there's much more to the forming of the hanging man candlestick pattern which the traders should be aware of. It must emerge on the price charts during the uptrend, and must have a lower long wick (shadow) which must be at least twice the size of the body. The body is constituted by the open and close prices, while the lower wick is the portion driven by the low price. The longer the size of the lower wick, the better signal it is for price reversal. Ideally, the upper wick should not exist at all, or at the most have a very miniscule size.
As for the confirmation candle, the bigger its body the stronger the reversal signal. The confirmation candle should be red in color indicating that the price reversal is on and prices have switched to declining mode.
The hanging man candle can have any size and any color. The only exception is that it should not be the Four-priced Doji Candle which has the same value for all four of its prices (open, high, low and close).
The next requirement for a reliable hanging man pattern is that it should form during an ongoing uptrending price movement. Formation of a hanging man candle pattern indicates that the price reversal is possible, and the ongoing trend of the green-colored bullish candles is expected to end soon. Before entering a trade based on the emergence of the hanging man pattern, many traders may like to wait for a confirmation candle to be formed immediately after the hanging man candle. If a red-colored confirmation candle is formed, it further supports the probability about the price decline in near future and the culmination of the uptrend. Its time to go short on the stock (sell), or cut the losses if already holding a long position. This is how a typical hanging man candlestick appears:

Trading the Hanging Man Candlestick

The hanging-mans form very regularly on the price charts of stocks, ETFs and market indexes - so one must be cautious to spot the right circumstances before entering into a trade. Following are the market moves that result in the formation of the hanging-man candle.

During an uptrend, the bulls (buyers) are pushing the prices upward. After few such green-colored candles indicating upward moves, the hanging man appears which has a small body formed of open and close prices in the upper half of the candle, and a very long lower wick with a low price value. It indicates that the price went to pretty low value, but rebounded from there to near around the open price. It means that the buyers (bulls) are now able to match the sellers (bears) and the market is getting into a state of indecisiveness. Since this emerges among an uptrending market, there is a strong possibility that prices may rebound to go down. The next formation of confirmation candle which should be red in color - that is, a bearish candle - will further support this probability, and the longer this confirmation candle the better it is for the forecast of price reversal. It will mean that sellers have snatched the control of prices from the buyers, and there is enough supply than demand so the prices are falling.
If a hanging man pattern formed following an uptrend, and it is followed by a bearish red-colored candle, it indicates that the buyers are being outpaced by the sellers, and the chances of price reversal looks good in the near future. If either of the hanging man and/or the confirmation candle is accompanied by a considerably huge volume, then it bumps up the chances of price reversal. The sellers have returned to the market in full swing with high supply, and hence they are getting stronger and are able to push the prices downards. Therefore, its time to go short - that is, sell the security, or cut the losses if holding a long position.

The hanging man candle pattern gains significance when formed during the uptrend. The formation establishes the base for a potential reversal in prices. Traders enter the trade when the hanging man is formed at the breakout of the upper Bollinger band, or at the breakout of the trend-line (like 200-day moving average), or at the breakouts of any other suitable ranges. The larger the breakout indicated by the length of the candlestick, the stronger the reversal pattern. If the hanging man is formed in the middle Bollinger band or far away from the trend-line (without breaching the trend-line), then the traders may not consider it as a strong reversal signal and they avoid the trade. When formed around the middle band or away from the breakout range, the hanging man often leads to continuation of the existing trend instead of a reversal.

Trading Scenario for Hanging Man

The following are the general considerations and scenrio for trading the hanging man candlestick.

▶ Trade Entry: Formation of hanging man during an uptrend is taken as a sign of reversal, that is - the market prices are expected to go down in the near term. So traders try to take a short sell position at or around the high price of the hanging man candle. As a few traders may like to wait for the confirmation candle to form, their sell price may be lower as the trend made the move which took the prices downwards. That's the tradeoff one needs to accept if waiting for a confirmation candle.

▶ Stop-loss Limit: The stop-loss varies from trader to trader based on their individual trade preferences, but usually while going long they set the stop-loss at 2-3 units below the low price of the hanging man baby candle. Others who enter at a higher price should adjust the stop-loss proportionatly.

▶ Profit-levels: While active trading at short intervals, traders must follow a risk-reward ratio to determine the possible profit level from their hanging man pattern trading. For instance, if the stop-loss limit is set at $10 for the trade (the maximum loss one is willing to take on a trade) and the risk-reward ratio one follows is 1/2, then one must take profits when it hits $20. If the risk-reward ratio being followed is 1/3, then one must aim for profits when the price hits a level that generated $3 for every $1 stop-loss set.

▶ Market Conditions: Along with the above mentioned hanging man formation requirement, traders should ensure that their selected price range, bands or trend-line limits are getting breached with large moves of the second bearish (and subsequent) candle. This ensures higher success rate of profitability. Although one must note that trading on technical analysis like candlestick patterns has limited success rate, so following strict stop-loss, disciplined trading and efficient capital management is advised.

Example of Hanging Man Candlestick

The following chart shows an instance of hanging man candlesticks and the uptrend that followed shortly after:

As one can observe in the above chart, the formation of the hanging man candle, where the candle has a considerably long lower wick, reversed the ongoing uptrend that preceded the first green candle, and led to a downward move indicated by the long red arrow. Additionally, there was a range breakout with large value which added to the possibility of the price reversal.
Traders usually set their profit targets and stop-loss levels based on the risk-reward ratio of their choice as mentioned in the previous section.

Latest Hanging Man Formations

FKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming hanging man candles is updated on a daily basis. At present, the following are three examples - one each from stocks, ETFs and indexes - which have formed the hanging-mans as of the mentioned date (in reverse chronological order):
1) On Monday, Jul 26, 2021, the stock price of Basic Industries sector based Cliffs Natural Resources Inc. (CLF) formed the following Hanging Man Candlestick pattern:

Open	High	Low	Close
$21.82	$22.18	$21.32	$22.02

Body-Length	Lower Wick Length	Upper Wick Length
0.20	0.50	0.16

		High: $22.18
		Body Range (O~C): $21.82 ~ $22.02
		Low: $21.32

See full details and past history of Hanging Man Candlesticks for Cliffs Natural Resources (CLF)

▶ Full list of stocks which most recently formed the Hanging Man Pattern

2) On Tuesday, Jul 27, 2021, the price of Multi-Cap based iShares US Home Construction ETF (ITB) ETF formed the following Hanging Man Candlestick pattern:

Open	High	Low	Close
$69.26	$69.74	$68.42	$69.64

Body-Length	Lower Wick Length	Upper Wick Length
0.38	0.84	0.10

		High: $69.74
		Body Range (O~C): $69.26 ~ $69.64
		Low: $68.42

See full details and past history of Hanging Man Candlesticks for iShares US Home Construction ETF (ITB)

▶ Full list of ETFs which most recently formed the Hanging Man Pattern

3) On Thursday, Jul 15, 2021, the value of popularly tracked leading stock market index Dow Jones Industrial Average (DJI) formed the following Hanging Man Candlestick pattern:

Open	High	Low	Close
$34,924.81	$34,990.41	$34,762.87	$34,987.02

Body-Length	Lower Wick Length	Upper Wick Length
62.21	161.94	3.39

		High: $34,990.41
		Body Range (O~C): $34,924.81 ~ $34,987.02
		Low: $34,762.87

See full details and past history of Hanging Man Candlesticks for Dow Jones (DJI)

▶ Full list of Market Indexes which most recently formed the Hanging Man Pattern

...and there's more. FKnol.com everyday checks the stock price and candlestick formation across hundreds of stocks, ETFs and indexes to look for hanging man formations. Please see the full list of recent hanging man formations for:
▶ Full list of recent Hanging Man Stocks
▶ Full list of recent Hanging Man ETFs
▶ Full list of recent Hanging Man Indexes

The Bottom Line

Trading candlesticks like the hanging man needs strict discipline and emotion-free trading. Candlestick trading is a part of technical analysis and success rate may vary depending upon the type of stock selected and the overall market conditions. Use of proper stop-loss, profit level and capital management is advised.