What Is the Hanging Man Candlestick Pattern and How Do You Trade It?

Red vs green Hanging Man

There are two types of Hanging Man candlestick: red and green. A red Hanging Man means that the price closed below where it opened and sellers are dominating. A green Hanging Man means that the price is higher than the opening one and buyers have taken control by the end.

A red one is considered a warning, like a yellow traffic light. The green one, however, requires more observation and increased attention.

The difference between a Hanging Man and a Hammer candlestick

A pattern that is often mistaken for a Hanging Man is the Hammer. The decisive factor in distinguishing them is the place of appearance.

• The Hanging Man appears at the peak of the chart after prices have risen and signals a possible market decline.

• The Hammer appears after prices have fallen and foretells the end of a bearish market. The Hammer occurs if sellers have lowered prices and buyers have intervened and raised them up. That trend means the market will start to grow.

To avoid mistaking a Hammer for a Hanging Man, pay attention to the trend leading up to the candlestick.

Inverted Hanging Man candles

Some people distinguish a pattern where the wick is located above the body of the candlestick. They call it an Inverted Hanging Man. However, this definition is not generally accepted in technical analysis. Some people confuse this pattern with a Shooting Star, which is formed after an uptrend, and has a long upper shadow and a small body at the base, while the lower shadow is either absent or small. Never call this pattern an Inverted Hanging Man.

Occurrence in uptrends and downtrends

How do you know when to pay attention to the Hanging Man and when to ignore this signal? You should remember that the Hanging Man is a reversal signal after an uptrend. Though candlestick patterns depend on many factors, like market conditions, timeframe, and other technical indicators, analysts consider the Hanging Man pattern to be a fairly reliable tool for determining market reversals, especially when combined with other indicators.

Here’s when you should pay attention to the Hanging Man pattern.

1. The Hanging Man forms after 3-5 green candles.

2. The Hanging Man appears after the price reaches the resistance level on the chart.

3. In the presence of other confirmations, for example, RSI showing overbought.

How to trade the hanging man candlestick pattern

Here’s how to trade using the Hanging Man candlestick. Do not rely on it alone. The pattern must be used in conjunction with other indicators, such as RSI, for additional confirmation.

1. Finding the trend and pattern. Find a candlestick with a small body and a long shadow. This is only relevant in an uptrend market.

2. Entry. Wait for confirmation when the next candlestick closes below the low of the Hanging Man. If this happens, open a sell position just below the next bearish candle.

3. Stop-loss. Set a stop-loss just above the high of the Hanging Man. If the body of the Hanging Man pattern is small, you can set the stop-loss based on the risk/reward ratio of the last resistance level.

4. Target. There is no single method for setting a target profit for the Hanging Man pattern. You can use the risk/reward ratio, the next resistance level, or the previous low for the take-profit.

Risk and limitations of the pattern

Candlestick patterns have their drawbacks and the Hanging Man is no exception. Be mindful of these when using this pattern.

1. False and ambiguous signals. This pattern can appear even when the market continues to grow, especially if the uptrend is very strong. Green candles can give especially ambiguous signals.

2. Limited information. The Hanging Man is a one-sided pattern that gives traders limited information, so you must use additional tools to confirm the trend.

3. Low reliability on small volumes. The pattern does not work on small market volumes.

4. The pattern does not work in volatile markets. In volatile markets, the Hanging Man pattern is useless and signals nothing.

Real-world examples and chart illustrations

Here’s an example of a Hanging Man candlestick being used on the AUD/USD currency pair.

1. Entry conditions. The candlestick formed on an uptrend, ideally at a resistance level or close to the overbought zone; for example, at a resistance level around 0.65877. It was followed by a bearish candle, confirming that the sellers are in control.

2. RSI above 70. The RSI level above 70 indicates an overbought market and confirms the likelihood of a reversal.

3. Stop-loss. You open a short position and set a stop-loss just above the high of the Hanging Man candle; for example, at 0.66000. This will provide protection in case the market does not reverse.

4. Take-profit. The nearest support level is around 0.65531. The take-profit order is placed there.