The hanging man pattern is a single-candle formation found at the top of an uptrend. This pattern is popular amongst traders as it is considered a reliable tool for predicting changes in the trend direction. A hanging man is considered a bearish
that issues a warning that the market may reverse soon as the bulls appear to be losing momentum. The reversal may not start as soon as the hanging man is formed. Instead, it generates a message that the current momentum may be in its closing stages as the price action prepares for a potential change in the trend direction. Characteristics of the Hanging Man pattern The hanging man belongs to a family of single-candle formations. This candle is created when the open, high, and close are of a similar price, while there is a long shadow to the downside. Ideally, this shadow, or wick, should be at least twice the length of the body.Similar to other candlesticks pattern the hanging man is a representative of the current market sentiment. As it is a bearish formation, it occurs at the top of an uptrend. Despite a high closing price, a long shadow that extends lower signals that an increasing number of bears are participating in the market. Thus, the rise of bears can only occur at the expense of the bulls, who have been in control of the price action up to this point. An extensive selling pressure was present during a part of the session which created a wick, although the bulls forced a close near the session’s high. The message is simple: don’t be surprised if the reversal takes place soon. Positive and negative energy aspects The obvious strength of the hanging man pattern is that it suggests a potential change in the price direction. On the other hand, the pattern is still a technical indicator. There is a message that conveys from the market, but that shouldn’t be taken directly as a signal. If we traded all signs from the market, we would end up in having tens and tens of opened trades on a daily basis. Hence, the takeaway is consistent with other candlestick patterns. It’s wise to consult other technical tools and aspects of the process to verify the validity of a signal issued by the hanging man pattern. Identifying the hanging man pattern As a single candle, the hanging man pattern is quite easy to spot, especially due to its long wick lower that tends to stick out. On the chart below, we have a EUR/USD hourly chart where the price action moves upside. Since this is a bearish reversal pattern, the trend must always be positive and bullish for a hanging man pattern to occur. In a short time frame, two hanging man candles are formed. The first candle hints that a reversal may take place, which is then confirmed with a long bearish candle afterwards. It’s a choppy price action so the price continues to trade without much clarity. Later, the price action forms the second hanging man pattern, followed by a bearish candle and a doji. All these candles signal that the reversal is imminent, a scenario that materializes shortly afterwards.
