Everything that you need to know about the Hanging Man candlestick pattern is here.
Today you’ll learn:
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.
The Hanging Man candlestick pattern is formed by one single candle.
Here’s how to identify the Hanging Man candlestick pattern:
It looks like this on your charts:
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:
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.
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:
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:
Here’s an example:
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:
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:
It looks like this:
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:
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:
According to the Encyclopedia of Candlestick Charts by Thomas N. Bulkowski (link), the Hanging Man candlestick pattern has a success rate of 59%.
Now I want to hear from you.
Do you trade the Hanging Man candlestick pattern?
Let me know in the comments below.
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