Everything that you need to know about the Hanging Man candlestick pattern is here.
Today you’ll learn:
- What Is The Hanging Man Candlestick Pattern
- How To Identify The Hanging Man Candlestick Pattern
- Variants of the Hanging Man Candlestick Pattern
- How To Trade The Hanging Man Candlestick Pattern
- Strategies To Trade The Hanging Man Candlestick Pattern
- Strategy 1: Pullbacks On Naked Charts
- Strategy 2: Trading The Hanging Man With Resistance Levels
- Strategy 3: Trading The Hanging Man With Moving Averages
- Strategy 4: Trading The Hanging Man With RSI Divergences
- Strategy 5: Trading The Hanging Man With Fibonacci
- Strategy 6: Trading The Hanging Man With Pivot Points
- What Is The Success Rate Of The Hanging Man?
- This is what you learned today
- Learn More
What Is The Hanging Man Candlestick Pattern
The Hanging Man is a Japanese candlestick pattern.
It’s a bearish reversal pattern.
Usually, it appears after a price move to the upside and shows rejection from higher prices.
The pattern is bearish because we expect to have a bear move after a Hanging Man appears at the right location.
It’s a reversal pattern because before the Hanging Man appears we want to see the price going up, thus it’s also a frequent signal of the end of a trend.
The Hanging Man pattern is also a mirrored version of the Shooting Star candle.
How To Identify The Hanging Man Candlestick Pattern
The Hanging Man candlestick pattern is formed by one single candle.
Here’s how to identify the Hanging Man candlestick pattern:
- The candle has a small body
- The wick at the bottom must be big compared to the body
- At the top, it should have no wick, or be very small
- The color of the body doesn’t matter
It looks like this on your charts:
Variants of the Hanging Man Candlestick Pattern
The Hanging Man candlestick pattern may appear a little different on your charts.
The color of the body doesn’t matter, it can be either red or green (bearish or bullish).
The existence or not of a wick (shadow) at the bottom doesn’t matter too. As long as it’s small you’re good to go.
Here’s what it may look like on your charts:
How To Trade The Hanging Man Candlestick Pattern
To trade the Hanging Man candlestick pattern it’s not enough to simply find a candle with the same shape on your charts.
In fact, there are other candlestick patterns that have the exact same shape, like the Hammer candlestick pattern.
Confused?
Let me explain.
What makes a pattern valid is not just the shape, but also the location where it appears.
This means that the same shape appearing at different locations may have different meanings.
When trading the Hanging Man, we want to see the price first going up, making a bullish move.
A Hanging Man appearing after this bullish move is a sign of a possible reversal to the downside.
It looks like this:
Now you’re thinking.
“When do I open my trade?”
It’s simple, the Hanging Man pattern is traded when the low of the candle is broken.
That’s your conservative trigger to short.
It looks like this:
Now, you also want to protect yourself because when trading things don’t always move as we expect.
And for that, we use a stop loss.
There are several different types of stop losses.
The most common is to use the other side of the pattern to set it.
But wait, don’t jump into trading the Hanging Man right yet.
There are a few more things to know.
Ideally, to increase the accuracy, we want to trade the Hanging Man candlestick pattern by combining it with other types of technical analysis or indicators.
Here are a few strategies to trade the Hanging Man pattern.
Strategies To Trade The Hanging Man Candlestick Pattern
Strategy 1: Pullbacks On Naked Charts
As a bearish reversal pattern, the Hanging Man is a great pattern to watch for when the price is on a downtrend.
Just wait for a pullback to start, and then spot when the Hanging Man appears.
That often signs the end of the pullback and the start of the new leg to the downside.
Here’s an example:
Strategy 2: Trading The Hanging Man With Resistance Levels
Support and resistance levels are great places to find price reversals.
Since we are looking for moves to the downside, we want to trade the Hanging Man using resistance levels.
How does it work:
- Draw resistance levels on your charts
- Wait for the price to go up and hit the resistance level
- Check if a Hanging Man appears at that level
- Short when the price breaks the low of the Hanging Man
- Set your stop loss and take profit levels, and expect a move to the downside
Here’s an example:
Strategy 3: Trading The Hanging Man With Moving Averages
Moving averages are great trading indicators to trade trends.
The idea here is to trade pullbacks to the moving average when the price is on a downtrend.
How does it work:
- Find a downtrend, with the price jumping below a moving average
- Wait for the price to go up and hit the moving average
- Check if a Hanging Man appears at the moving average
- Short when the price breaks the low of the Hanging Man
- Set your stop loss and take profit levels, and expect another leg to the downside
Strategy 4: Trading The Hanging Man With RSI Divergences
This is a bit different from the other trading strategies.
To find a bearish RSI Divergence we want to see the price on an uptrend first, making higher highs and higher lows.
Here’s how it works:
- Find an uptrend
- Mark the highs that the price makes after each leg to the upside
- At the same time compare the price highs with the RSI indicator
- When you see the RSI making lower highs while the price making higher highs, you found your divergence
- Now you wait until a Hanging Man appears at a price higher high, aligned with an RSI lower high.
- Short when the price breaks the low of the Hanging Man
- Set your stop loss and take profit levels, and expect a move to the downside.
It looks like this:
Strategy 5: Trading The Hanging Man With Fibonacci
Another popular way of trading the Hanging Man candlestick is using the Fibonacci retracement tool.
Fibonacci shows retracement levels where the price will tend to revert frequently.
Depending on the strength of the trend, different levels are more likely to work better with the Hanging Man pattern. Here you can learn more about the different Fibonacci retracement levels.
Here’s how the strategy works:
- You want to see the price on a downtrend, or at the start of a new one
- Then you wait for a move to the upside, they always happen at some point
- Pick your Fibonacci tool and draw the levels from the high to the low of the move
- When the price hits a Fibonacci level and prints a Hanging Man, that’s what you are waiting for
- Short when the price breaks the low of the Hanging Man
- Set your stop loss and take profit levels, and expect a move to the downside
Strategy 6: Trading The Hanging Man With Pivot Points
Pivot Points are automatic support and resistance levels calculated using math formulas.
If you are day trading, the Daily Pivot Points are the most popular, although the Weekly and Monthly are frequently used too.
Here’s how to trade the Hanging Man pattern with Pivot Points:
- Activate the Pivot Points indicator on your charts
- Check which Pivot Points are above the price, those will tend to work as a resistances
- Ideally, you want to see the price on a downtrend, although it’s not required
- Wait for a price move to the upside to a Pivot Point level
- At that level, you want to see a Hanging Man pattern appearing, meaning that the level is being rejected
- Short when the price breaks the low of the Hanging Man
- Set your stop loss and take profit levels, and expect a move to the downside
What Is The Success Rate Of The Hanging Man?
According to the Encyclopedia of Candlestick Charts by Thomas N. Bulkowski (link), the Hanging Man candlestick pattern has a success rate of 59%.
This is what you learned today
- The Hanging Man is a single-candle pattern.
- To be valid, it must appear after a move to the upside.
- It’s a bearish reversal pattern, meaning that it signs a potential reversal to the downside.
- To increase the accuracy, you can trade the Hanging Man using pullbacks, moving averages, and other trading indicators.
- The winning rate of the Hanging Man is 59%.
Now I want to hear from you.
Do you trade the Hanging Man candlestick pattern?
Let me know in the comments below.
Learn More
- List of all candlestick patterns explained
