What is a hanging candlestick?
A hanging candlestick occurs during an uptrend and warns that prices may start to fall. The candle is made up of a small real body, a long lower shadow and little or no upper shadow. The hanged man shows that interest in selling is starting to increase. For the reason to be valid, the candle following the suspended man must see the price of the asset fall.
Key points to remember
- A hanging man is a downside candlestick that occurs after prices rise. The advance can be small or large, but it should consist of at least a few price bars moving higher overall.
- The candle should have a small real body and a long lower shadow which is at least twice as large as the real body. There is little to no upper shade.
- The end of the hanging man can be above or below the opening, just being close to the opening is enough for the real body to be small.
- The long lower shadow of the hanging man shows that the sellers were able to take control during part of the trading period.
- The reason for the suspended man is only a warning. The price must drop lower on the next candle for the hanging man to be a valid reversal pattern. This is called confirmation.
- Traders usually exit long trades or enter short trades during or after the confirmation candle, not before.
What does the Hanging Man candlestick tell you?
A hanging man represents a big sale after opening, causing the price to plummet, but buyers then push the price close to the opening price. Traders view a suspended man as a sign that the bulls are starting to lose control and that the asset may soon enter a downtrend.
The hanging man model occurs after the price has gone up for at least a few candlesticks. This does not have to be a major step forward. This may be the case, but the trend can also occur as part of a short-term rise in the midst of a larger downtrend.
The hanging man looks like a “T”, although the appearance of the candle is only a warning and not necessarily a reason to act.
The hanging man model is only confirmed if the price drops the following period or shortly after. After the hanging man, the price should not close above the high price of the hanging candle, as this potentially signals another price increase. If the price drops as a result of the hanging man, this confirms the pattern and candlestick traders use it as a signal to exit long positions or enter short positions.
If you enter a new short position after confirmation from the hanging man, a stop loss can be placed above the top of the hanging man’s candle.
The hanging man, and candlesticks in general, are not often used in isolation. Rather, they are used in conjunction with other forms of analysis, such as price or trend analysis, or technical indicators.
Pendent men perform at all times, from one-minute charts to weekly and monthly charts.
Example of the use of a hanging candlestick for men
The graph shows a drop in prices, followed by a short-term rise in prices where a hanging candle is formed. After the man hangs, the price drops on the next candle, providing the confirmation necessary to complete the pattern. During or after confirmation, candle traders could enter short trades.
The example shows that the suspended man does not need to come after an extended advance. On the contrary, it can potentially mark the end of a short-term rally in a longer-term downward trend.
The difference between the hanging man and the hammer candlesticks
The hanging man and the hammer candlesticks look identical. The only difference is the context. The hammer is a pattern of hollows that form after prices drop. The hammer shape shows a strong sale during the period, but in the end, buyers regained control. This indicates that a possible bottom is near and that the price could start to rise if confirmed by an upward movement on the next candle. The hanged man comes after a price hike and warns of potentially lower prices to come.
Limits of use of the hanging chandelier
One of the limitations of the hanging man, and many models of candlesticks, is that waiting for confirmation can lead to the wrong entry point. The price can change so rapidly during the two periods that the potential reward of the transaction may no longer justify the risk.
The reward can also be difficult to quantify at the start of the transaction, since candlestick patterns generally do not provide profit targets. Instead, traders must use other candlestick patterns or trading strategies to exit any trade initiated via the hanging man model.
There is also no assurance that the price will drop after training a hanging man, even if there is a confirmation candle. This is why it is recommended to place a stop loss, to control the risk, above the highest of the suspended man when a short trade is initiated.