As a trader in the stock market, you must have come across candlestick charts. Candlestick charts are one of the most widely used analytical tools to understand the movement of stocks and market sentiments. These candlesticks can form many different patterns, each with its own significance, such as doji, bullish engulfing pattern, spinning top, hammer, and the hanging man candlestick pattern, among others.
While some of these patterns may indicate a neutral trading time period, some are indicators of potential upcoming stock price reversals, and some indicate market indecision. Candlesticks, with their widespread use, are often clubbed together with other methods of technical analysis to get a clearer picture of stock market trends.
In this article, we will understand one of the key share price reversal indicators—the hanging man candlestick pattern.
Hanging man candlestick pattern
The hanging man candlestick pattern is characterised by a singular candle with a small body. The body being small is an indicator of the opening and closing prices of a stock being in close range. In addition to a small body, the hanging man candle has a short upper wick and a tall lower wick. The long lower shadow is an indicator of rising selling interest in the share.
Thus, overall, the hanging man candlestick is composed of a small body, a short upper wick, and a tall lower wick.
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How to spot the hanging man pattern
The hanging man candlestick pattern appears at the crest of a bullish trend. When the stock price share has been experiencing a trend of price increase and the buyers are dominating the market, a hanging man pattern may appear, indicating a strong entry of the sellers into the equation. Thus, as the hanging man pattern appears at the top of an upward trajectory, it is also categorised as a bearish price reversal candlestick pattern.
Hanging man signal interpretation and example
Just like several other candlestick patterns, the hanging man pattern must also be viewed and analysed in conjunction with its former and latter candles to get a clearer picture of the stock market trend. The most important aspect of the hanging man candle is not its colour (red or black defining a bearish candle and white or green describing a bullish candle), but the body ratio. The ratio of its small body to the wicks must be similar regardless of the colour.
However, it is key to note that a bearish hanging man candle is a more effective sign of price reversal. If a hanging man candle is formed at the highest part of an uptrend, it is a potential indicator of a strong entry of sellers and an upcoming price reversal. Even though it is a potential signal of bearish pressure, it in itself is not a sign to sell the stock. On its own, the hanging man candle is not evidence of a price reversal but does signify a potential peak of the bullish trend thus far. The traders can make more confident decisions if the candle after the hanging man pattern also reinforces price reversal signs. For the buyers, it can be a good point to sell and exit with profits, and for the bears, it is a good entry point in the market.
Let us understand this with an example. The share price of company A has been rising steadily in the market for the past two weeks. The bulls are in control here, and there is a strong buying trend. But on the next trading day, the share closes very near to the opening price. Moreover, the low of the day is comparatively very strong to that of the high and the opening. This would form a hanging man candle as it is coming at the peak of the bullish trajectory. This is a marker that bears have tried to gain control, and there may be a potential price reversal in the market.
Conversely, if there is a spinning top pattern formed at the end of a bearish trend, followed by a significantly bullish green candle, this pattern is known as the morning star candlestick pattern.
While the hanging man pattern is comparable to the shooting star pattern, hammer, and doji, it maintains its distinction as a bearish price reversal sign.
Hanging man candle vs Hammer candle
One of the most commonly used terminologies alongside the hanging man candlestick pattern is the hammer candle. The easiest way to understand what the hammer candle is to recall the signals that the hanging man candle carries and reverse them. In appearance, the hanging man candle and the hammer candle are alike. However, the difference lies in where the candles are formed and what they signify. While the hanging man pattern is formed at the crest of a bullish trend and is a potential bearish price reversal indicator, the hammer pattern is formed at the trough of a bearish trend and is a potential bullish price reversal indicator. A crucial thing to note is that both candle patterns need to be followed by another candle, which reinforces the corresponding price reversal trend.
Limitations of using the hanging man candlestick
Here are the limitations of using the hanging man candlestick pattern:
- Waiting for confirmation: When traders and investors use the hanging man pattern, they have to wait for confirmation, which may result in a poor entry point for the trade. This is because the price can fluctuate so quickly that the potential profits from the trade may become lower than the risk involved in the trade.
- Hard to quantify: The hanging man pattern does not provide a profit target, which makes the profit potential hard to quantify in monetary terms. This forces traders and investors to use other candlestick patterns to identify an ideal exit point.
- No assurance: When using the hanging man pattern, there is no assurance that the price will decline even after the stock forms the hanging man pattern. Hence, traders and investors have to use stop-losses when initiating a short-selling trade.
Are there any other technical indicators similar to the hanging man?
There are other technical indicators that traders and investors use to predict that the stock price will fall from a specific price range. Some of the main technical indicators similar to the hanging man include the Doji, the shooting star, and the inverted hammer.
When is the best timeframe to use the hanging man?
The hanging man candlestick pattern is mostly used by traders and investors on short to medium-term timeframes, such as daily or weekly charts, where it can signal potential reversals in uptrends. In intraday trading, traders use the hanging man pattern for short timeframes, such as 15-minute to 1-hour charts.
What are the best indicators to use with the hanging man?
Most traders and investors use other indicators, along with the hanging man, to better identify a potential downtrend. Although the best indicators depend on the trading strategy of individual traders and investors, the most commonly used indicators are momentum indicators, trend indicators, moving averages, support and resistance levels, and Fibonacci retracements.
Conclusion
Understanding candlestick patterns like the hanging man is essential for traders in the stock market. The hanging man candlestick, with its small body, long lower shadow, and short upper wick, signifies potential bearish pressure and a potential bearish reversal in stock prices, appearing at the peak of a bullish trend. At the same time, it is crucial to analyse this pattern in conjunction with other indicators. Recognising such patterns effectively aids traders in making informed decisions regarding buying and selling points in the stock market, ultimately impacting their profitability.
