Candlesticks - Vol 6 - Hanging Man
Type: Reversal Pattern
Appearance: Opening price and closing prices are both at or very near the high price of the bar, with a much lower daily intra-candle low.Typical Duration: 1 bar/candle
Description: The reasoning behind this pattern is that despite the high closing price, it is one of the first signs of buying interest starting to dry up, with sellers managing to make a significant intra-candle low before being overpowered by buyers.
- Rising trend - the hanging man is only valid after a significant up trend in price.
- The daily open, high, and close must be equal or nearly equal. By their very definition.
- The hanging man pattern is confirmed more definitely if price moves down the following bar.
Strengths: It is a very early signal that buyers may be drying up, potentially getting you in the market very early in the process of a trend reversal. Stop losses can be set very tight and take profits can be large, since a larger scale down trend is just being formed. This sets us up with a very attractive reward:risk ratio.
Weaknesses: The selling pressure can easily come from profit taking or from large non-speculative flows, showing many false reversals. Statistically, the hanging man pattern on its own does not provide any discernible edge in the market, and is akin to a coin toss.
How to Trade It:
Most studies done on the hanging man pattern on daily charts suggest that it provides no detectable edge in trading. Therefore, the pattern should only be used as confirmation of other technical or fundamental signals that point to a trend reversal. In the absence of such signals, it is not recommended for traders to base any trades on a hanging man reversal pattern alone. Should such confirming signals exist, the way to trade it is to wait for the next bar to make a high that is slightly above the close of the hanging man, and enter a short position. Stop losses can be fairly tight, and take profit targets can be large in case the trend really is reversing. Studies on how well this pattern works on intraday charts are not available at this time.
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