Identifying different patterns in the stock market is crucial to making informed decisions about your investment and to also avoid losses. There are various tools and technical indicators to find promising trading opportunities in the stock market and one of them is the candlestick pattern. You must have already heard about the candlestick pattern as it is one of the tried-and-tested methods and within its cluster is the hanging man pattern that we will discuss in detail.
To begin with, the hanging man candlestick pattern features a small body with a short or no wick on top and a long shadow below. A simple rule for reading this type of candlestick is based on the colour. For instance, if the candlestick is white or green, it indicates that the stock price is closing at a higher level at which it opened, and if it’s black or red then it is closing lower than at which it opened.
To use the hanging man candlestick pattern in your trading strategies it is important that you first understand the various aspects of this pattern.
Types of Hanging Man Candlestick Pattern
Let’s first start by understanding different types of hanging man candlestick patterns:
Under this type of pattern, you can see a red body that indicates a lower closing point at which the stock initially opened, thus signifying a strong bearish signal. This also means that the market is being controlled by the seller.
Under this pattern, you can identify that the body is green simply because the closing price of the stock was higher than what it opened at, thus suggesting a bullish signal where buyers might be losing strength, allowing the seller to control the market.
Note: In addition to identifying the colours on the hanging man candlestick pattern it is also important to remember that a red hanging body signals a strong chance of trend reversal as compared to the green body.
Characteristics of the Hanging Man Pattern
It is important to learn about a few characteristics of the hanging man pattern before you decide to implement it in your trading strategy. Here are a few characteristics that you must bear in mind:
The hanging man candlestick pattern features a long lower shadow, small or no upper shadow and a small real body.
The candlestick in the hanging man pattern must feature a long lower shadow and an upper shadow that is minimal or even non-existent.
The small real body indicates a bullish or bearish trend that can be found at the top of the candlestick. Additionally, the real body shows that the price movement during this period was minimal and various market factors were unable to push the price any higher.
To ensure that the candlestick is a hanging man pattern it must feature the following:
How to Identify the Hanging Man Pattern in Charts?
To identify a hanging man candlestick pattern, you can look for the following traits:
Typically, under a hanging man candlestick pattern the candle has a small body lying close to the bottom of the price range. The small body of the candle indicates that the buyer and seller were unsure about the price. Additionally, remember that the candle's body is usually red or green.
Another unique feature of the hanging man candlestick pattern is that it has a very short upper wick or a non-existent upper wick. In cases where there exists a short upper wick, it signifies that the buying pressure was low in the market and the prices might hit south.
The lower wick starts below the body and it represents the lowest price during that period. The lower wick in a hanging man candlestick pattern is the longest feature that can be two times as long as the body or even more. If you identify a long shadow, remember that it means that the sellers have pushed the price down.
Significance of the Hanging Man Candlestick Pattern
In a nutshell, you must know that the hanging man pattern is an indication of a potential downtrend. Since it mostly represents a bearish reversal signal, traders often take this as a signal of a market condition where buyers are losing control and sellers are gaining control.
Here is a list of a few factors that make hanging man candlestick pattern significant:
The hanging man candlestick pattern is widely used to understand a market condition that has the potential for trend reversal. The pattern indicates a downtrend after an uptrend.
Traders often rely on the pattern to hold short positions especially if the pattern is followed by a bearish signal.
The hanging man candlestick pattern serves as an alert or caution for buyers who have been holding long positions to switch their positions. The pattern indicates a window where buyers can take profits and exit or at least reduce too much market exposure.
Note: Remember that the hanging man candlestick pattern is reliable for technical analysis of the market. However, for accuracy, it is suggested to use the pattern along with other technical indicators. Additionally, the accuracy and reliability of this hanging man pattern depend on different factors, like market conditions and the time frame you are looking at.
Trading Strategies Using the Hanging Man Candlestick Pattern
Now that you have a fair understanding of the hanging man candlestick pattern let’s see how you can use the pattern in your trading strategies.
A simple rule that you must keep in mind is to hold a short position as soon as the candle comes close below the hanging man.
Implementing stop-loss orders is crucial when you are developing trading strategies. Hanging man candlestick patterns can be used to identify when to close your short position or set a stop-loss order. If you observe that the prices are rising above the high of the hanging man, then this is your signal to close your short position, and if the hanging man's body is small this maybe your window to implement a stop-loss order.
You can target profit windows by relying on the risk-reward ratio or imposing a stop-loss method.
Pros and Cons of Hanging Man Candlestick Pattern
Just like any other technical indicator, the hanging man pattern also comes with certain pros and cons that you must bear in mind before including it in your trading strategy.
Pros of the Hanging Man Candlestick Pattern
One of the key advantages of relying on a candlestick pattern is that it is very easy to identify or recognise as it has a small body along a lower shadow. Even as a beginner in the market the trend is very easy to grasp.
Since the hanging man candlestick pattern is an indicator of trend reversal, it can be used as an early warning that the current market trend might change. Simply put, the pattern suggests that once the high has come, the market can start moving downward at any point thus, helping the traders implement their next trading strategy.
Making the hanging man candlestick pattern along with other technical indicators helps make better trading decisions as it provides a clear picture of the market.
Cons of the Hanging Man Candlestick Pattern
Relying solely on the pattern might not be the right decision as the hanging man candlestick pattern needs confirmation from other technical indicators.
The pattern is considered reliable only when the market has reached a high. In other contexts, like unstable or sideways markets, the pattern fails to provide accuracy.
There are chances that the pattern might appear even when the market continues to rise or move in the same direction thus sending a false signal of potential trend reversal.
Conclusion
The hanging man candlestick pattern is a widely used technical indicator to identify trend reversal in the market. Although it requires accurate context and conjunction with other technical indicators, the hanging man candlestick pattern is reliable and worth exploring for beginners in the market as it is easy to grasp. All you need is to identify a candlestick pattern with a small body and long lower shadow to understand that the hanging man pattern has emerged thus showing a trend reversal in the market. To start your trading journey, make sure to choose a reliable broking platform to open your demat and trading account.