First introduced by Steve Nison to the western world, candlestick patterns are important tools for technical analysis in the stock market. These patterns may consist of one or more candlesticks. These longitudinal bars signify a bullish market if they are green (or light) in which case the opening price is higher than the closing price for the trading period in consideration. Similarly, red (or dark) candlesticks imply that the closing price of a security is lower than the opening price and are then referred to as bullish candlesticks.
Another important characteristic of candlesticks is the wick. Also referred to as shadow, it tells us the opening and closing prices of a security. The upper threshold of the wick in a green candlestick denotes the closing price whereas the lower threshold of the red one signifies the opening price. Similarly, the upper threshold of the shadow in a red candlestick tells us what the closing price is while the lower threshold reveals the opening price.
There are many types of candlesticks but the most common among them are rising three methods, falling three methods, shooting star candlestick, piercing line candlestick and the hanging man candlestick, the topic of this article.
What is a hanging man candlestick?
The hanging man pattern generally appears when the price of a particular security on the uptrend. It signifies that the interest of investors who hold the security is waning they might be preparing to sell, thus bringing down the price. It is believed that the hanging man pattern generally reveals a reversal in market sentiment regarding a stock and as such there’s no more momentum to propel the price upwards. However, it is not advisable to sell an asset just looking at the hanging man candlestick.
Anatomy of a hanging man pattern
- The hanging man candlestick is generally bearish, meaning it’s dark or red in colour
- The lower wick of the hanging man should be equal to or more than double the length of the body. This is an important evidence to make sure that sell-side investors are aggressive in their intent
- The hanging man pattern is stronger if the volume of trading (girth of the candlestick) is a better indicator of a trend reversal, according to some experts
- The length of the upper wick should be small. It should be close to the lower wick, meaning the body of the hanging man needs to be small
How to trade the hanging man candlestick?
- Those that precede a bearish trading period, indicate a better than average trading volume and have a lower closing price are better indicators of a change in market sentiment
- It is preferable to first look for evidence of the hanging man in a longer period of trading chart such as weekly or daily before searching for a good entry point in a shorter time frame
- One should be careful to look for more indicators supporting the hanging man such as the simple moving average, relative strength index etc to decide if the market is on the cusp of a reversal
- It should be read as a warning rather than a sure shot indicator of a weakening market
- A stop-loss is generally positioned above the most recent high as the new high would mean that the same trend will carry forward
A stop-loss is generally positioned above the most recent high as the new high would mean that the same trend will carry forward
There are also some disadvantages of a hanging man that an investor should be aware of. Firstly, candlesticks in general can’t help you with a price target. As such one should remain in the trade for the time period that the trend reversal is sustained and eject quickly when the asset price picks up. The hanging man is not a very reliable indicator of a change in market direction. Accordingly, it should be backed up by supporting evidence such as longer wicks and better volumes on the next trading period after it appears.
One should be cautious to not confuse the hanging man with shooting star and hammer candlestick patterns as they might look similar. A shooting star is basically a hanging man turned upside down. And the only point of difference between a hammer candlestick and a hanging man is the formal signals of a market direction where the bulls are getting in control of the security in question.