The Hanging Man Pattern: A Comprehensive Guide

Edited & Reviewed by: Taranjit Singh 

Disclaimer

What is the Hanging Man Pattern

In finance and investing, a "hanging man" is a bearish candlestick pattern that can indicate a potential reversal in an uptrend. It forms when there is a small body near the top of the candlestick with a long lower shadow, resembling a "hanging man." This pattern suggests that buyers have pushed the price up during the day, but sellers have regained control and pushed the price down by the end. However, this pattern should be interpreted with other technical and fundamental analyses to confirm a potential reversal.

What are the key characteristics of a valid hanging man pattern?

A valid Hanging Man pattern is a technical analysis tool that can help traders identify potential bearish reversals in the market. Here are the key characteristics of a valid Hanging Man pattern:

1. Candlestick body: The Hanging Man pattern is formed by a small candlestick body near the top of the trading range. This indicates that the market opened and closed near the same level, with little price movement during the day.
2. Lower shadow: The Hanging Man pattern has a long lower shadow, which indicates that the market opened lower but rallied throughout the day. The lower shadow should be at least twice the length of the body.
3. No upper shadow: Ideally, the Hanging Man pattern should not have an upper shadow. If there is an upper shadow, it should be relatively small compared to the body and the lower shadow.
4. Volume: The volume of trading should decrease as the pattern forms. This indicates that the bulls are losing control of the market and that the bears are starting to take over.
5. Confirmation: To confirm the reversal signal, traders should look for a follow-up bearish candle, a break below the support level formed by the low of the Hanging Man candle, or a decrease in volume as the pattern forms.

Example

As you can see, this is a Google chart with a 3-minute time frame that clearly shows an example of a hanging man pattern. After the appearance of a hanging man, the market tends to go down quickly. This is a clear example of a hanging man pattern in action.

Keys Takeaways

1. The hanging man pattern is often seen as a reliable reversal signal when it appears at the end of an uptrend.
2. However, some traders are skeptical of the pattern's reliability and argue that it can sometimes appear in the middle of a trend, resulting in false signals.
3. To increase the accuracy of the hanging man pattern as a reversal signal, some traders recommend using it in conjunction with other technical indicators and analysis techniques.

How can the hanging man pattern be used to predict market reversals?

To use the Hanging Man pattern to predict market reversals, traders should look for confirmation of the reversal signal. This can come in the form of a follow-up bearish candle, a break below the support level formed by the low of the Hanging Man candle, or a decrease in volume as the pattern forms.

It's important to note that the Hanging Man pattern is not foolproof and can sometimes result in false signals. Therefore, it should be used in conjunction with other technical indicators and analysis techniques to increase the accuracy of the prediction.

How is the hanging man pattern used in trading?

When a hanging man pattern appears in an uptrend, it can be a sign that the trend is weakening and that a reversal may be imminent. This is because the long lower shadow of the hanging man pattern indicates that there was significant selling pressure during the day, which could indicate that the bulls are losing control of the market.

If a trader notices a hanging man pattern in an uptrend, they may decide to sell their long positions or enter into short positions in anticipation of a downtrend. To do this, the trader would need to identify a potential short entry point.

One way to do this is to wait for confirmation of the reversal signal. This can come in the form of a follow-up bearish candle, a break below the support level formed by the low of the hanging man candle, or a decrease in volume as the pattern forms.

Once the reversal signal has been confirmed, the trader may decide to enter into a short position at the market price or a predetermined price level. They may also choose to use stop-loss orders to limit their potential losses if the market moves against them. 

How can a trader confirm a hanging man pattern?

To confirm a hanging man pattern, a trader should look for a few key indicators. First, the pattern should have a small body near the top of the trading range, with a long lower shadow that is at least twice the length of the body. Ideally, there should be little or no upper shadow.

Next, the trader should look for confirmation of the reversal signal. This can come in the form of a follow-up bearish candle, a break below the support level formed by the low of the hanging man candle, or a decrease in volume as the pattern forms.

For example, if the hanging man pattern appears at the top of an uptrend, the trader may wait for a follow-up bearish candle to confirm the reversal signal. This bearish candle should have a larger body than the hanging man candle and should close below the low of the hanging man candle.

Alternatively, the trader may look for a break below the support level formed by the low of the hanging man candle. This break below support can be a strong indication that the trend is reversing and that the trader should sell their positions or enter into short positions.

Finally, the trader should consider the volume of trading as the hanging man pattern forms. Ideally, the volume should decrease as the pattern forms, indicating that the bulls are losing control of the market.

How reliable is the hanging man pattern as a reversal signal?

Firstly, it's important to note that the hanging man pattern is not a foolproof indicator of a market reversal. While it can provide valuable insights into market trends, it should not be used in isolation to make trading decisions. Instead, traders should use it in conjunction with other technical indicators and analysis techniques to increase the accuracy of their predictions.

The reliability of the hanging man pattern can also depend on the market conditions and the time frame being analyzed. For example, the pattern may be more reliable in a strongly trending market than in a ranging market. Similarly, the pattern may be more reliable in higher time frames than in lower time frames.

Another factor that can affect the reliability of the hanging man pattern is the confirmation of the reversal signal. As I mentioned earlier, a trader can confirm the reversal signal by looking for a follow-up bearish candle, a break below the support level formed by the low of the hanging man candle, or a decrease in volume as the pattern forms. The stronger the confirmation signal, the more reliable the hanging man pattern is likely to be.

What is the difference between a hanging man pattern and a hammer pattern?

The hanging man pattern and the hammer pattern are both technical analysis tools used to predict market reversals, but they differ in their appearance and the market conditions in which they appear.

The hanging man pattern is characterized by a small body near the top of the trading range, with a long lower shadow and little or no upper shadow. The long lower shadow indicates that there was significant selling pressure during the day, while the small body suggests that the bulls were unable to maintain control of the market. This pattern can appear at the end of an uptrend and can indicate a potential reversal.

On the other hand, the hammer pattern is similar in appearance to the hanging man pattern, but it appears at the bottom of a downtrend. It is characterized by a small body near the bottom of the trading range, with a long lower shadow and little or no upper shadow. The long lower shadow indicates that there was significant buying pressure during the day, while the small body suggests that the bears were unable to maintain control of the market. This pattern can indicate a potential reversal and the start of an uptrend.

The key difference between the two patterns is their appearance and the market conditions in which they appear. The hanging man pattern appears at the end of an uptrend and can indicate a potential reversal, while the hammer pattern appears at the bottom of a downtrend and can indicate the start of an uptrend.

Professionals' Opinion on Hanging Man

Some traders believe that the hanging man pattern is a reliable indicator of a market reversal, particularly when it appears at the end of an uptrend. They argue that the long lower shadow of the pattern indicates that there was significant selling pressure during the day, which can be a sign that the trend is weakening.

Other traders, however, are more skeptical of the hanging man pattern's reliability. They argue that the pattern can sometimes appear in the middle of a trend, rather than at the end and that it can result in false signals.

To increase the accuracy of the hanging man pattern as a reversal signal, some traders recommend using it in conjunction with other technical indicators and analysis techniques. For example, a trader might look for confirmation of the reversal signal in the form of a follow-up bearish candle, a break below the support level formed by the low of the hanging man candle, or a decrease in volume as the pattern forms.

Conclusion

In conclusion, the hanging man pattern is a powerful tool in technical analysis, offering traders valuable insights into potential market reversals. Its striking appearance, with a small body and long lower shadow, tells a story of a battle between bulls and bears, with the bears momentarily gaining the upper hand.

While some traders may question its reliability, the hanging man pattern has proven itself to be a valuable indicator when used correctly. By combining it with other technical indicators and analysis techniques, traders can increase its accuracy and make more informed decisions about buying and selling securities.

As we've seen, the hanging man pattern can be a reliable indicator of a market reversal, particularly when it appears at the end of an uptrend. However, it's important to remember that no technical indicator is foolproof, and the hanging man pattern is no exception. Traders must exercise caution and use their best judgment when interpreting this pattern.

Ultimately, the hanging man pattern is a symbol of the dynamic and ever-changing nature of the markets. It reminds us that even amid a strong uptrend, there is always the potential for a reversal. By staying vigilant and informed, traders can use the hanging man pattern to their advantage and navigate the markets with confidence and success.

What is a hanging man pattern?
A hanging man pattern is a bearish reversal pattern in technical analysis that can indicate a potential market top or trend reversal. It is characterized by a small body with a long lower shadow, indicating that there was significant selling pressure during the day, but that the bulls were able to push the price back up by the end of the day.

How can I identify a hanging man pattern?
To identify a hanging man pattern, look for a small body with a long lower shadow, and a high that is higher than the previous day's high. The pattern should appear at the end of an uptrend and should be confirmed by a follow-up bearish candle or a break below the support level formed by the low of the hanging man candle.

How reliable is the hanging man pattern as a reversal signal?
The hanging man pattern can be a reliable reversal signal when used correctly, but it's important to remember that no technical indicator is foolproof. To increase the accuracy of the hanging man pattern as a reversal signal, some traders recommend using it in conjunction with other technical indicators and analysis techniques.

What is the difference between a hanging man pattern and a hammer pattern?
While both the hanging man and hammer patterns have a small body with a long lower shadow, the hammer pattern is a bullish reversal pattern that appears at the bottom of a downtrend, while the hanging man pattern is a bearish reversal pattern that appears at the end of an uptrend.

How can I confirm a hanging man pattern?
To confirm a hanging man pattern, look for a follow-up bearish candle, a break below the support level formed by the low of the hanging man candle, or a decrease in volume as the pattern forms. These confirmation signals can help increase the accuracy of the hanging man pattern as a reversal signal.

Who named the hanging man pattern?
The hanging man pattern is named for its appearance, which resembles a stick figure with a hanging man at the end of an uptrend. The long lower shadow of the pattern is said to represent the "rope" that the hanging man is hanging from, while the small body at the top of the pattern represents the head of the stick figure.

What are the key takeaways about the hanging man pattern?
The hanging man pattern is a powerful tool in technical analysis, offering traders valuable insights into potential market reversals. When used correctly, in conjunction with other technical indicators and analysis techniques, the hanging man pattern can be a reliable indicator of a market reversal, particularly when it appears at the end of an uptrend. However, it's important to remember that no technical indicator is foolproof, and traders must exercise caution and use their best judgment when interpreting this pattern.