Hanging Man

 


Shape:
The hanging man is a bearish reversal candlestick pattern that typically forms after an uptrend.
It consists of a small real body near the top of the candle’s range, a long lower shadow (at least twice the length of the body), and little to no upper shadow.
This pattern signals that selling pressure is increasing despite an initial attempt by buyers to push prices higher.

Success Rate:
Historically, the hanging man has a moderate success rate of around 55–65%, but its reliability increases when confirmed by subsequent bearish candles and higher volume.

Buy:
Not applicable directly — this is a bearish reversal signal. However, aggressive traders may attempt countertrend buys in rare cases if confirmation fails.

Sell:
Enter a sell position when the next candle closes below the low of the hanging man, confirming the reversal.
Increased volume during the confirmation candle strengthens the signal.

Take Profit (TP):

  • Conservative: Recent support level.

  • Aggressive: Next significant demand zone or Fibonacci retracement (e.g., 50% level).

Stop Loss (SL):
Place the stop loss slightly above the high of the hanging man candle.

Profit Trailing:
Use a trailing stop to lock in profits as the price moves in your favor. Adjust the stop loss level downwards as the price falls, keeping it a set distance below the current price.

Lot Size:
Determine the lot size based on risk tolerance and account size, ensuring the potential loss (difference between entry price and stop loss) does not exceed a set percentage (e.g., 1–2%).

Risk-to-Reward Ratio:
Aim for a ratio of at least 1:2 to ensure potential profits outweigh risks.

Leverage:
Use leverage cautiously as reversals can sometimes fail. Over-leveraging may magnify losses.

Other Conditions:

  • Best works at strong resistance zones after a prolonged uptrend.

  • Confirm with overbought readings from oscillators like RSI or Stochastic.

Caution:

  • False signals can occur if the market is in a strong bullish trend.

  • Avoid relying solely on the hanging man without confirmation from the next candle.

Pros and Cons of the Hanging Man Pattern

Pros:

  • Clear reversal signal when confirmed.

  • Easy to identify due to its distinct shape.

  • Works well when combined with resistance levels and volume analysis.

Cons:

  • Moderate success rate — needs confirmation.

  • Can appear in sideways markets, producing false signals.

  • Less effective in very strong bullish markets.

Trading Psychology of Hanging Man

Formation:

  • Uptrend: Buyers are in control, pushing prices higher.

  • Intraday Selling: Despite early gains, sellers push prices down significantly during the session, creating the long lower shadow.

  • Buyer Recovery: Buyers manage to push prices back near the open, but the selling pressure is a warning sign.

Market Sentiment:

  • Buyer Exhaustion: The long lower shadow signals that sellers are testing the market, and buyers are losing strength.

  • Seller Confidence: Sellers interpret the pattern as an opportunity to reverse the trend.

Breakout Psychology:

  • Anticipation: Traders who spot the hanging man wait for a close below its low for confirmation.

  • Volume Confirmation: A spike in volume during the bearish confirmation candle strengthens the case for reversal.

  • Bearish Momentum: Once confirmed, more sellers join in, accelerating the price decline.

Post-Breakout:

  • Validation: A strong close below the hanging man’s low confirms bearish control.

  • Profit-Taking: Some traders secure profits at initial support levels; others trail positions for deeper declines.

Failure and Risk Management:

  • False Signals: Hanging man without confirmation may just be a pause in the uptrend.

  • Stop Loss: Protects against losses if the trend continues upward.