The Complete Guide to Trading the Hanging Man Candlestick Pattern

The hanging man candlestick pattern is one of the most popular candlestick chart patterns used in technical analysis and trading. But what exactly is the hanging man pattern and how can traders use it to make profitable trades? This comprehensive guide will teach you everything you need to know.

What is the Hanging Man Candlestick Pattern?

The hanging man is a single candlestick pattern that forms at the end of an uptrend and signals a potential reversal in the market. It gets its name from its shape – a small real body (closing price near opening price) with a long lower shadow that looks like a “hanging man”.

The key characteristics of a hanging man candlestick are:

  • Forms after an uptrend of at least three candles
  • The real body is small and located near the top of the trading range
  • There is little to no upper shadow
  • The lower shadow is long, at least 2-3 times the height of the real body

Psychology Behind the Hanging Man

During an uptrend, the bulls are in control and the hanging man shows a shift in momentum where the bears start to gain strength. The long lower shadow represents sellers entering the market and driving prices down after hitting a peak.

However, the small real body shows that the bulls were still able to push back and close the candle near the open. This battle between bulls and bears creates uncertainty in the market going forward.

Essentially, the hanging man pattern indicates the potential end of an uptrend, but does not provide confirmation on its own. Traders will want to look for a follow through candlestick the next trading day for that confirmation.

How to Identify a Hanging Man Candlestick

Here are the key criteria for properly identifying a hanging man candlestick:

  • Check that the candlestick forms at the top of an established uptrend, usually after at least 3-5 green candles.
  • The real body should be small, close to the top of the candle, and have limited to no upper shadow. A long upper shadow indicates too much buying pressure.
  • There must be a long lower shadow that is at least 2-3 times the height of the real body. This shows the strong rejection and selling pressure.
  • The lower shadow should extend out of the range of the previous candle’s body to represent a turn against the trend.
  • Ideal hanging man candles open within the body of the previous candle then sells off. The color of the candle body is not important.
  • High trading volume on the candle increases the pattern’s validity as it further supports a change in momentum.

Hanging Man vs. Hammer

The hanging man candlestick looks very similar to the hammer candlestick and differs only in where it appears in the chart. Hammers form after a downtrend while hanging men form after an uptrend.

How to Trade the Hanging Man Candlestick

Now that you know how to identify the hanging man pattern, let’s discuss how to actually trade hanging man candlesticks:

1. Wait for Confirmation the Next Day

The hanging man pattern itself provides an early warning of a potential trend reversal, but does not provide a trading signal on its own. You’ll want to wait for the next trading day to confirm the pattern.

Ideally, the next candle will open below the hanging man’s real body and continue descending to validate the reversal signal. This is called the confirmation candle.

The darker the confirmation candle’s color and larger its descending range, the stronger the signal.

2. Place a Short Trade

Once confirmed, the hanging man pattern signals conditions are favorable for a short trade. You would sell short, place stop loss above hanging man’s real body, and target previous support levels.

3. Use Japanese Candlestick Analysis

Look for other supporting candlesticks patterns like doji, shooting stars, or engulfing patterns that reinforce the reversal signal indicated by the hanging man. Combining patterns increases success rates.

4. Consider Volume

Hanging men with heavy trading volume give stronger signals than low volume hanging men. Make sure volume is above the 10-day exponential moving average.

5. Wait for Support Break

After confirmation, wait for previous uptrend support levels or moving averages to break before entering short trades. A break of support indicates the reversal is underway.

6. Be Aware of News and Events

Hanging man patterns that form due to positive news events are less likely to lead to a reversal. Pay attention to any underlying news or events driving price action.

Hanging Man Candlestick Trading Examples

Now let’s walk through some real hanging man candlestick examples in uptrends and how traders would approach them.

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Example 1

This BTC/USD chart on TradingView shows an ideal hanging man candlestick pattern:

[insert example hanging man chart image]

Key things to note:

  • The hanging man forms at the high of a strong uptrend, meeting all criteria
  • The next candle opens below the hanging man’s body and sells off heavily, confirming the signal
  • With confirmation, traders would look to enter short positions with a stop above the hanging man’s real body

Example 2

Here’s another example on the EUR/USD forex pair:

[insert example forex hanging man chart]

As you can see:

  • The hanging man again forms at the high of an uptrend and has a long lower shadow
  • However, the next candle gaps up and continues the bull trend rather than confirming
  • Therefore, no trading signal is generated and bulls remain in control

This illustrates why confirmation on the next candle is so important!

How Accurate is the Hanging Man Candlestick Pattern?

The hanging man pattern can be quite accurate when applied properly with confirmation, robust volume, and combined with other analysis techniques. Here are key statistics:

  • Accuracy Rate: Approximately 70%
  • Risk/Reward Ratio: At least 1:1 with stops above hanging man high
  • Winning Trades: Target only 30-70% of previous uptrend range after confirmation

As with any candlestick pattern, performance and win rates will vary across different timeframes, markets, and individual securities. But used with proper confirmation, robust trading volume, and risk management – the hanging man pattern can be quite profitable.

Strategies to Improve Hanging Man Candlestick Trading

Follow these tips to boost your trading performance with the hanging man candlestick pattern:

  • Wait for confirmation – Never trade just the hanging man alone! Always wait for bearish confirmation on the next candle.
  • Use stop losses – Manage risk by placing stops above the high of the hanging man’s real body. Move to breakeven once position becomes profitable.
  • Confirm with other patterns – Combine the hanging man with supporting signals from other candlestick or chart patterns that align.
  • Analyze previous support zones – Strong hanging man signals will often reverse back down to test previous support levels or moving averages.
  • Focus on high volume – Give priority to hanging men with above average trading volume for stronger signals.
  • Have a trading plan – Set profit targets and stop losses for each hanging man trading signal before entering the trade. Discipline is key.

Common Questions About Hanging Man Candlesticks

Here are answers to some frequently asked questions about trading the hanging man pattern:

1. Does the hanging man work for day trading or scalping?

Yes, the hanging man can be used for day trading but confirmation and follow through the next day become more important. Look for it in combina­tion with other intraday candlestick patterns in the direction of the overall trend.

2. Can hanging men form at market bottoms?

Typically hanging men form at market tops but they can occasionally form near bottoms during pullbacks in a downtrend. Trade these bottom hanging men differently by going long after bullish confirmation.

3. What does a hanging man at market open mean?

A hanging man at the open of a trading session is more significant if it exceeds the prior session’s range. It could help form an exhaustion gap and signal an impending reversal after an overextended advance.

4. Does the hanging man work on every timeframe?

The hanging man pattern can work on all timeframes. However, it’s more reliable on 1 hour, 4 hour daily, and weekly charts. Use shorter timeframes only for confirmation or fine-tuning entries and exits.

5. What percentage move confirms a hanging man pattern?

Ideally a move of at least 50% of the hanging man’s body up or down from the open price helps confirm it. The larger the confirmation candle’s body and range, the stronger the signal.

6. Is the shadow length important on a hanging man candle?

Yes, an ideal hanging man has a lower shadow that is at least 2-3 times the height of the real body. This validates the intense selling pressure that creates the long lower tail candle shape.

Hanging Man Candlestick Pattern – Final Thoughts

Whether you’re day trading or swing trading – mastering the hanging man candlestick pattern can give you an edge in timing market reversals. Just remember to wait for bearish confirmation on the next candle before placing trades.

Combine the hanging man with other candlestick patterns, support/resistance levels, and chart indicators to improve accuracy. With the right approach, this high probability candlestick pattern can boost your trading performance.

I hope this complete guide gives you everything you need to successfully trade hanging man candlesticks. Let me know in the comments if you have any other questions!

“If you don't find a way to make money while you sleep, you will work until you die.”

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