Hanging Man Candlestick guideline (PDF)

The Hanging Man candle stands for a reversal candlestick pattern that arises at the top of an upside move and signals a likely bearish change in the trend direction. Many chartists utilize this formation to establish faithful short entries in the forex and cryptocurrency markets. Hence comprehending the Hanging Man Candlestick Pattern is so advantageous for forex and crypto traders. Let us review this single candlestick pattern as a reliable warning that the exchange can reverse soon towards the downside.

Hanging man candlestick guide

What Is the Hanging Man Candlestick Pattern?

A Hanging Man candlestick pattern is a candle structure that happens at the top of a bullish move as a bearish reversal pattern. To explain, it warns FX traders that the price may reverse downwards as soon as possible in the forex market. Yet, the candlestick itself is not the sell signal. Because the reverse in the price activity may not initiate exactly following the hanging man formation. Rather, this pattern is a warning notice that the crypto market has already created a top. In fact, what occurs in the subsequent session next to the hanging man candlestick really signals whether the price is reversing or not.

Hence, this candlestick structure alerts buyers who are already holding the asset for further gains about a potential change in the price movement. In other words, it alerts them to take their profits before it turns to losses. Moreover, a hanging man formation alerts sellers about potential entry grades, yet contingent on other confirming signals that we will discuss later.

What does it look like?

A Hanging Man formation looks like another candlestick pattern that is formed at the bottom of a downward movement with almost equal open, close, and high prices. However, the hanging man location forms at the top of an uptrend. Both of them possess an elongated lower tail that measures twice the altitude of their entire body. Besides, the body could be red and we get the bullish nomination of the pattern. Alternatively green for the bearish nomination.

Red and green Hanging Man

First, let us begin with the bearish red hanging man candlestick. To explain, it occurs if high and open prices are equal. Second, the green version occurs when high and close prices are early equivalent. Note that it still stands for a bearish sign on the price chart. However, it is a weaker sign than that of the red Hanging Man as the trading day closed with some gains. Also, the green candle shows that buyers were able to take the price higher at the end of the day. In short, whether the body is red or green, it is always considered a bearish warning.

What does hanging man candlestick indicate?

A hanging man candle means an intense expansion of the selling pressure at the peak of the current uptrend. Because moves get exhausted over time. So, when the price reaches its highest limit, the market sentiment among cryptocurrency investors turns bearish in favor of bears. You can notice this mechanism on the following USDJPY H4 chart where the emergence of the hanging man candle has ended the upside move resulting in massive selling pressure. In fact, the candle following the pattern is big and red at the same time which confirms the bearish effect of the previous hanging man candlestick.

Interpretation

The pattern interpretation resides in its extended lower wick. In fact, it warns that an extreme bearish activity has happened during the trading session but without succeeding to maintain until the candle closes. Yet, there is o guarantee that this pressure would be valid for the next sessions. That is why the following price movement is the key signal, but not the hanging man candlestick itself.

Why is Hanging Man candle bearish?

The fact that sellers were capable of dropping the price significantly during the day demonstrates that bears are getting powerful and their attempt to overtake the market control in the forex exchange. That is why the hanging man candle and especially its elongated downer tail is considered a strong bearish warning after a prolonged uptrend movement, especially when the body is red. Moreover, this one candle formation pinpoints that the price has reached an overbought condition. Hence, the Hanging Man candlestick, that picks at the top of a bullish move, implies that bears may join to control the forex or crypto market at any moment. In short, the hanging man formation itself may serve as a confirmation candle of the overbought situation. In fact, many crypto and forex traders employ it in adjunction to an oscillator, such as the RSIndex.

bearish hanging man rev

How to identify a Hanging Man formation on the chart?

It is so basic to spot and identify the hanging man formation as it is a single candle pattern on the candlestick chart. Below, are two hanging man structures shaped on this chart. The first structure suggests a probable occurring reversal. However, subsequent choppy price activity does not completely confirm the reverse. Afterward, that same pattern forms a second time followed by a big bearish candlestick. Hence, an imminent reversal is confirmed after all these signs and the reverse scenario takes place briefly thereafter. That is why it is essential to analyze the chart in a detailed manner because the hanging man is not a selling signal itself as we discussed before.

Trading examples

The hanging man is a useful candlestick pattern to place short orders when the bearish market sentiment is demonstrated and confirmed in the subsequent price activity on the trading chart. Moreover, it is better to trade the formation using trend lines and taking into consideration the long-term trend direction.

Example 1

On the following daily chart, a hanging man candlestick emerged at the top of the upward move. First, this formation broke the upward trendline. Second, the next candle confirmed the rebound as a bearish one below the considered trendline. Note that the reversal occurred immediately next to the hanging man structure in this example. However, this is not always the case.

hanging man candle

Example 2

Here, the rebound has not directly occurred after the hanging man candlestick. In fact, the price activity shifted from a bullish move to a consolidating phase. To explain, this may suggest that the reversal would not be strong as in the first example.

hanging man candlestick

How Reliable is the Hanging Man candlestick?

The Hanging Man is a reliable and profitable pattern at the same time. Nevertheless, The rebound in the price activity is not guaranteed after this candlestick formation. Let us focus on the accuracy of the structure in forex and crypto exchanges. To explain, it implies that the forward price movement is likely to resist the uptrend continuance as the candlestick forms after a strong bullish move. In other words, the hanging man is an accurate structure highlighting a potential resistant area that may cause the price to rebound. Overall, chartists have better within an appropriate trading strategy in order to get additional confirmation signs and reduce their risk.

Conclusion

A Hanging Man candle is a single candlestick pattern that reveals a probable change in the trend direction after a strong upward movement. The formation can assist currency traders in initiating short trades as soon as it emerges with some confirming signals, such as oscillators.