What is the Hanging Man Candlestick?
The “hanging man” is a bearish financial candlestick pattern that represents a potential reversal in an uptrend. In particular, a hanging man pattern forms at the end of an uptrend. Due to the uptrend reaching its peak, a reversal is likely to occur. The hanging man candlestick pattern is shown below:
The hanging man also indicates that there was a notable sell-off during the day, which was unable to be pushed back up again by the buyers.
- The “hanging man” is a candlestick pattern that represents a potential reversal in an uptrend.
- The hanging man candlestick pattern only occurs if it includes a small real body, long lower shadow, and the asset’s been in an uptrend.
- A candlestick is a type of price chart used to display information about a security’s price movement.
How Does the Hanging Man Occur?
The hanging man candlestick pattern only occurs when two criteria are met:
- The hanging man candlestick comprises a small real body and a long lower shadow.
- The financial asset has been in an uptrend.
When a hanging man candlestick forms in an uptrend, it shows a loss of buyer strength. The hanging man candlestick represents high demand and significant selling. Due to the high demand, buyers can push the stock price near the opening, but a peak is near. The forecasted peak and eventual downtrend provide investors an opportunity to sell existing short positions.
- Real Body: The wide, box-like section of a candlestick. It examines if a stock’s closing price was greater or less than its opening price.
- Shadow: Sometimes referred to as the wick, a shadow is a line on a candlestick that is used to indicate where the stock price varied relative to the opening and closing prices.
What is a Reversal and an Uptrend?
A reversal is a price direction change of an asset. For example, if an asset was experiencing an uptrend, it would not be beneficial for a reversal to occur. It is because it would change the price direction of an asset downward. For a hanging man candlestick pattern, the reversal is generally short term.
An uptrend represents the upward price movement of an asset.
What is a Candlestick?
A candlestick refers to a type of price chart that is used in technical analysis to display information about a security’s price movement. A candlestick displays high and low prices of securities, along with their opening and closing prices over a specific period of time.
What are the Features of a Candlestick?
Below are the three basic features of a candlestick that measure security price:
- Body: Represents the open-to-close price range.
- Wick: Used to indicate intra-day highs and lows.
- Color: Reveals the direction of market movement. Green or white candlesticks represent a price increase, while red or black represents a price decrease.
Bearish, Bullish, and Continuation Candlestick Patterns
Candlestick patterns are technical trading tools used in finance to predict price direction. Candlestick patterns are divided into three groups – bearish patterns, bullish patterns, and continuation patterns.
Each of the groups below contains separate indicators on the trajectory of price direction.
- Bearish: Most commonly, bearish candlestick patterns form an upward trend and signal a point of reference. Examples of bearish candlestick patterns include the hanging man, shooting star, evening star, three black crows, and the dark cloud cover.
- Bullish: In most cases, bullish candlestick patterns form after a downtrend in the market. They are also known to signal a reversal of price movement. Examples of bullish candlestick patterns include the hammer, inverse hammer, piercing line, morning star, and three white soldiers.
- Continuation: Continuation candle patterns represent no change in market direction. They can help the trader identify rest periods in the market or when the market trends in a similar direction. Examples of continuation candle patterns include the spinning top, falling three-method, rising three-method, and Doji.
CFI offers the Certified Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: