Candlestick patterns — The Hanging Man

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8 min readNov 6, 2022

Introduction

Candlestick patterns have very vivid, descriptive names. Their names are useful in helping us to understand what types of patterns they are and where in the chart we are likely to find them. In this case the hanging man is as ominous as it sounds. It is a bearish reversal pattern.

Four data points are used to construct all individual candlesticks. They are the open, close, high and low. These data points help illustrate to the knowledgable trader the state of the battle between the bulls and the bears who make up the majority of market participants. Candlestick patterns can appear in all time frames, in this instance we will concentrate on daily price patterns.

Appearance of the Hanging Man

The hanging man is a single candle stick pattern. Because it is a reversal pattern, there must be something for it to reverse prior to the appearance of the pattern. It is not necessary for the market to be in an uptrend, but there must be a recognizable price rise preceding the appearance of the pattern.

The hanging man is one of a type of candle known as a spinning top. These are candles with small real bodies. The size of the shadows are not important in the formation of the spinning top, it is the small size of the real body that is of consequence. The size of the shadows varies and can range from no shadows to shadows that are of a similar size top and bottom, to shadows that are elongated either on top or on the bottom of the real body. Spinning tops also form components of other candle stick patterns such as the morning and evening star.

In this instance the spinning top has a short or non existent upper shadow and a long lower shadow. When this pattern comes during an uptrend or price rise, it is known as a hanging man. When it comes after a price decline or during a down trend, it is known as a hammer. As we shall see, these two candlestick patterns are completely different in their interpretations. As with all candlestick patterns, their position on a price chart is essential to their correct interpretation.

Construction of the Hanging Man

As with all candlestick patterns, four data points are used in their construction. The open is near the top of the pattern as is the close. Because the two datapoints are close, the real body is small. The real body of the hanging man can be black or white, but it must be small. The hanging man will have a long lower shadow which is two or three times the length of the real body. The low and the high of the candle (in our case, trading day) is at extreme ends of the price range during the trading day. There may or may not be an upper shadow. If there is an upper shadow it will be small. but usually the upper shadow is non existent which means that that open or close and the high are the same.

KEY TAKEAWAYS

The hanging man is a type of candlestick pattern and refers to the candle’s shape and appearance, representing a potential reversal in an uptrend.
Candlesticks display a security’s high, low, opening, and closing prices for a specific time frame and reflect the impact of investors’ emotions on prices.
The hanging man occurs when two criteria are present: an asset has been in an uptrend, and the candle has a small real body and a long lower shadow.

Understanding the Psychology

In all time frames there is a battle unfolding between bulls and bears. Price charts are used to interpret this unending battle. Candlesticks provide an extremely vivid interpretation of price patterns. By looking at a particular candlestick pattern, the trader can get an immediate visual clue as to who is in control of the market. Originally used in the 1700s by rice traders in Japan, candlesticks have gained popularity in the West for their picturesque terms and easy interpretation.

The color of the real body of the hanging man is not important. There must be a small real body and a long lower shadow. The lower shadow must be at least two times, preferably three times the length of the real body, The market opens at its high, bulls are in control. But during the trading session, the bears gain dominance and push down the price. The bulls regain the upper hand and push price up. Sometimes they will succeed in pushing price to close higher than the open, other times though they eventually dominate they will not succeed in pushing price to close above the open. In either case a small real body is formed.

Interpreting the Psychology

The price pattern of a hammer and a hanging man is exactly the same, but their interpretation is completely different. This is because of their position on a price chart. A hammer will come after a price decline. It is a bullish reversal pattern because it shows that the market sold off during the session, but then bulls came in and drove price higher. The hanging man comes after a price advance, it is bearish because it shows that price had been advancing over successive days. The bulls were firmly in control. But then on the day the hanging man formed, bulls were at first in control. But during the session the bears came in and pushed price down. The bulls came back in and pushed price up. But the reassertion of bears in the market, shows that bulls are no longer firmly in control.

The chart below shows two hanging man patterns in Meta (META), formerly Facebook stock, both of which led to at least short-term moves lower in the price. The long-term direction of the asset was unaffected, as hanging man patterns are only useful for gauging short-term momentum and price changes.

Distinguishing Features

If it’s an actual hanging man pattern, the lower shadow is at least two times as long as the body.1 In other words, traders want to see that long lower shadow to verify that sellers stepped in aggressively at some point during the formation of that candle.

Thomas Bulkowski’s “Encyclopedia of Candlestick Charts” suggests that the longer, the lower shadow, the more meaningful the pattern becomes. Using historical market data, he studied some 20,000 hanging man shapes.2 In most cases, those with elongated shadows outperformed those with shorter ones. Some traders will also look for strong trading volume. Bulkowski’s research supports this view. Of the many candlesticks he analyzed, those with heavier trading volume were better predictors of the price moving lower than those with lower volume.

Another distinguishing feature is the presence of a confirmation candle the day after a hanging man appears. Since the hanging man hints at a price drop, the signal should be confirmed by a price drop the next day. That may come by way of a gap lower or the price simply moving down the next day (lower close than the hanging man close). According to Bulkowski, such occurrences foreshadow a further pricing reversal up to 70% of the time.3

It’s worth noting that the color of the hanging man’s real body isn’t of concern. All that matters is that the real body is relatively small compared with the lower shadow.

Trading the Hanging Man

The hanging man patterns that have above-average volume, long lower shadows, and are followed by a selling day have the best chance of resulting in the price moving lower. Therefore, it follows that these are ideal patterns to use as a basis for trading.

Upon seeing such a pattern, consider initiating a short trade near the close of the down day following the hanging man. A more aggressive strategy is to take a trade near the closing price of the hanging man or near the open of the next candle. Place a stop-loss order above the high of the hanging man candle. The following chart shows the possible entries, as well as the stop-loss location.

One of the problems with candlesticks is that they don’t provide price targets. Therefore, stay in the trade while the downward momentum remains intact, but get out when the price starts to rise again. Hanging man patterns are only short-term reversal signals.

A Question of Reliability

If looking for any hanging man, the pattern is only a mild predictor of a reversal. Look for specific characteristics, and it becomes a much better predictor. Bulkowski is among those who feel the hanging man formation is, in and of itself, undependable. According to his analysis, the upward price trend actually continues a slight majority of the time when the hanging man appears on a chart.4

However, there are things to look for that increase the chances of the price falling after a hanging man. These include above-average volume, longer lower shadows, and selling on the following day. By looking for hanging man candlestick patterns with all these characteristics, it becomes a better predictor of the price moving lower. Stick to trading only these strong types of patterns.

Hanging Man vs. Shooting Stars and Hammers

There are two other similar candlestick patterns. This can lead to some confusion.

The hanging man appears near the top of an uptrend, and so do shooting stars. The difference is that the small real body of a hanging man is near the top of the entire candlestick, and it has a long lower shadow. A shooting star has a small real body near the bottom of the candlestick, with a long upper shadow.5 Basically, a shooting star is a hanging man flipped upside down. In both cases, the shadows should be at least two times the height of the real body. Both indicate a potential slide lower in price.

The hanging man and the hammer are both candlestick patterns that indicate trend reversal. The only difference between the two is the nature of the trend in which they appear. If the pattern appears in a chart with an upward trend indicating a bearish reversal, it is called the hanging man. If it appears in a downward trend indicating a bullish reversal, it is a hammer. Apart from this key difference, the patterns and their components are identical.6

The Bottom Line

Hanging men occur frequently. If you highlight them all on a chart, you will find that most are poor predictors of a price move lower. Look for increased volume, a sell-off the next day, and longer, lower shadows and the pattern becomes more reliable. Utilize a stop loss above the hanging man high if you are going to trade it.