Hanging Man Candlestick Pattern

A Hanging Man candlestick pattern is a bearish reversal candlestick pattern. This candlestick pattern signals that the uptrend has just ended or is in the final, and I do mean final, stages of the uptrend.

For those holding shares of a company when a Hanging Man candlestick pattern develops on its stock chart, this candlestick signals it is time to lock in gains and sell some shares as price declines are more likely than not projected for the short-term, if not longer.

When all the requirements and characteristics of a Hanging Man candlestick pattern are met, one should consider selling shares and locking in gains. At least wait to see what happens in the short-term before deciding to re-enter the position.

The term “hanging man” implies that anyone holding shares will be “hung” in their position. Do you want to be hung in your position? If not, then consider and evaluate your scale-out strategy.

A Hanging Man candlestick pattern is a sign that the bearish investors are ready to step in. Matter of fact, they already did step in by helping to push the price down and create the long lower shadow as part of the Hanging Man candlestick. I believe the sellers are testing the support underneath the current price. Then they let the bullish buyers bid back up the price before the end of the trading session.

When this pattern appears at the top of a long and extended uptrend, there are usually a nominal amount of buyers left for the stock. Everyone has already bought into the stock. Sellers tend to gain the upper-hand at this moment.

Requirements

Listed below are the requirements for a Hanging Man candlestick pattern.

• A Hanging Man candlestick pattern is a bearish reversal candlestick pattern
• The real body of the Hanging Man can be either green or red colored
• The Hanging Man candlestick must develop at the end of an uptrend
• The length of the candlestick’s lower shadow must be at least twice the length of the real body

Characteristics & Observations

Listed below are some of the characteristics and observations I have made for Hanging Man candlestick patterns over the years.[s2If !current_user_can(access_s2member_level1)]…..

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• Hanging Man candlestick patterns that develop at the end of long protracted uptrends tend to offer the stiffest resistance areas
• The longer and steeper the uptrend before the Hanging Man candlestick pattern, the better the chances are for a trend reversal from an uptrend to a downtrend
• When the Hanging Man candlestick pattern develops on buying volume that is the heaviest in several trading sessions, the likelihood of a reversal from an uptrend to a downtrend is significantly increased
  • There is an excellent chance that a Bullish Impulse wave pattern just completed a Wave 5 when this happens
• The longer the lower shadow is on a Hanging Man candlestick pattern, the stronger the resistance tends to be
• From an Elliott Wave perspective, Hanging Man candlestick patterns have tendencies to develop in Wave 4 of Bullish Impulse wave patterns
  • Wave 4 is typically where the first wave of sellers start locking in gains from the Bullish Impulse wave pattern’s uptrend

Bullish Counter-Part

The bullish counterpart to the Hanging Man candlestick pattern is the Hammer candlestick pattern.

Visually, a Hanging Man candlestick pattern and a Hammer candlestick pattern can look identical. The only difference between the 2 patterns is where they develop in a trend.

Did the candlestick develop at the bottom of a downtrend? Then it is a Hammer candlestick pattern because Hammer candlestick patterns develop at the bottom of downtrends.

Did it develop at the top of an uptrend? Then it is a Hanging Man candlestick pattern because Hanging Man candlestick patterns develop at the top of uptrends.

Make sure you know the difference between the two patterns so you don’t get mixed up on which trading strategy you should be reviewing.

Resistance Area

The resistance area for a Hanging Man candlestick pattern is defined as the top of the real body of the candlestick pattern. Analyze the price & volume action leading up to the Hanging Man candlestick pattern. Then determine if any required trading actions should take place.

The price and volume activity leading up to a potential resistance area from a bearish reversal candlestick pattern should always be taken into consideration to help determine if the the candlestick pattern will reverse the uptrend or not. Since Hanging Man candlestick patterns tend to develop in Wave 4 of a Bullish Impulse wave pattern, there is a chance for one last push above the resistance area from the candlestick.

Trading Strategies

I will review 2 different trading strategies for this bearish reversal candlestick pattern. The first strategy will review scaling-out of a position that you hold when the candlestick pattern develops. The second and more aggressive strategy will involve entering into a short sale position based on further anticipated declines in the share price.

Always be sure to step back and analyze the “trend of one larger degree“. This can help you determine if the pullback is going to be shorter-term in nature or if it is the start of something extremely more bearish in nature.

If You Are Currently Long the Stock

You may have noticed other sell signals flashing before the development of the Hanging Man candlestick pattern. If you did and already scaled out of a few shares, congratulations. If that is not the case and you are still holding all your shares, you will want to begin a scale-out process.

If the Hanging Man candlestick pattern develops on selling volume that is significantly above average, make an immediate 1/3 scale-out sale to lock in a chunk of gains.

Make a second scale-out sale of shares on any failure to break above the resistance area from a Hanging Man candlestick on its 1st re-test of the candlestick’s resistance area. If that re-test fails and the price begins falling again, that is confirmation to make a second scale-out purchase.

That would leave you with about 1/3 of your holdings left. I prefer to use a 3 step scale-out process. If you want to be sure to lock in gains at higher prices, you can be more aggressive and use a 2 step scale-out process. You can determine what you want to do with the last 1/3.

One thing to keep in mind is the scale of the chart where you see the Hanging Man candlestick develop. Is it a daily chart? Is it a monthly chart? The scale of the chart will help to determine the speed in which your selling actions need to take place.

For example, if you notice a Hanging Man candlestick pattern develop on a monthly candlestick chart, you may have 1-3 weeks to execute the scale-out process and try to maximize profits. But be quick because a larger drop is coming. When a Hanging Man candlestick pattern develops on a daily candlestick chart, you may between 1-3 days to execute the scale-out process.

It is very important to keep everything in perspective based the scale of the chart you are analyzing. Also use other technical analysis methods for confirmation rather than relying on the candlestick pattern by itself. These other method can help to provide additional areas that can be used as scale-out areas once the downtrend is confirmed.

If You Are Looking to Short the Stock

Before entering into a short position, wait for confirmation of a Hanging Man candlestick pattern. Hanging Man candlestick patterns tend to develop in Wave 4 of a Bullish Impulse wave pattern, meaning there still could be one more push upwards shortly after the Hanging Man before the longer consolidation period does begin.

Confirmation involves the beginning of the next candlestick’s development. Wait for the first break to happen, either a break above the resistance area or a break below the pattern on heavy selling volume. If the break to the downside occurs, that is the confirmation to short sell the stock.

To make the short sale a successful trade, ensure the selling volume and selling momentum are both increasing. A MACD Histogram is a great tool to use when monitoring buying and selling momentum. Make sure there is an increase in the selling momentum after the development of the Hanging Man candlestick pattern. Any slow down in selling momentum is an early indicator to start analyzing the charts and thinking about locking in short sale profits. This is simply done by purchasing shares to cover the shares sold short.

Since prices tend to move down quicker than they move up, short selling can be a very profitable trading strategy. However, it does carry the additional risk of “unlimited losses” when compared to going long on a stock. You need to know when to lock in losses in order to be a successful short seller. If you have a hard time selling anything for a loss, don’t use short-selling as a strategy. If you are not quick to pull the trigger on a loss, that loss can start leading to exponentially larger losses.

In order to minimize risk on a short position, only enter into a short sale trade after capitulating buying volume takes place. Look for a Climax Top volume spike. A capitulating volume spike helps to confirm the bearishness of a Hanging Man candlestick pattern.

Stop-Loss on Short Sale

To try and further minimize risk, a stop-loss order should be used on all short trading strategies. For a Hanging Man candlestick pattern, place the stop-loss order in 1 of 2 places:

1. at the resistance area from the Hanging Man candlestick pattern as described above
2. place a tighter stop-loss order at the bottom of the lower shadow of the Hanging Man candlestick pattern, once a break below the lower shadow has occurred on above average selling volume

After forming a Hanging Man candlestick pattern, any meaningful downtrend should start relatively soon thereafter. Maybe the price does have one last push above the resistance area from a Hanging Man. Either way, be ready to start the short sale process soon after the development of a Hanging Man candlestick pattern.

Wait for the selling volume to start increasing along with an increase in selling momentum as indicated by the MACD Histogram chart tool.

Real Chart Examples

This chart is a 1 year daily candlestick chart for Johnson & Johnson. It shows several different Hanging Man candlestick patterns that developed over the last year that met the requirements listed above.

This Hanging Man candlestick patterns illustrated on Johnson & Johnson’s (JNJ) chart is a prime example how there was still one last significant push above the Hanging Man candlestick patterns resistance areas.

If nothing else, a Hanging Man candlestick pattern indicates it is time to develop a scale-out strategy if you are long shares.

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