Hanging Man Candlestick Pattern: A Complete Trading Guide

The Hanging Man candlestick pattern is one that catches many traders’ attention. It is a technical analysis tool that shows up at the end of an uptrend and might signal a potential reversal. But like any pattern, it’s not foolproof. Traders who blindly rely on it without context or confirmation often get caught on the wrong side of the market. If you’ve ever seen this pattern and wondered, “Should I sell now?” this guide will help you understand exactly what it means, when it works, and when it doesn’t.

The Hanging Man is a bearish reversal pattern that appears after an uptrend. It has a small real body near the top of the candle, a long lower wick, and little to no upper wick. This tells traders that buyers pushed the stock price up, but selling pressure comes in aggressively, forcing the closing price lower before a slight recovery by the close.

Key Characteristics

• It is a technical indicator that forms after an uptrend.
• Small real body near the high.
• Long lower wick, at least twice the size of the body.
• Little to no upper wick.
• Bearish patterns (lower close on the next candle) strengthen the signal.

The Hanging Man suggests weakness in the uptrend, but it needs confirmation from the next candle before traders take action.

The Hanging Man candlestick pattern is illustrated below.

• Appears after an uptrend.
• Small, real body at the top of the range.
• Long lower wick, showing buyers lost control.
• Little or no upper wick.
• Bearish confirmation is required (the next candle closing is lower).

The Hanging Man tells a story of hesitation. On the trading day, the market starts strong, and bulls push the upward price movement. But the sellers soon take control, driving the price range down significantly before a slight recovery by the close. The long lower wick shows buyers fought back but couldn’t fully regain control.

For traders, this hints at a potential shift in momentum. If the next candle closes lower, it confirms that buyers are losing power, and a reversal could follow. But without that follow-through, it could just be a temporary shakeout before the uptrend continues.

The Hanging Man is most effective in trending markets, specifically after a prolonged uptrend. When the market direction is already overextended, a Hanging Man can act as a warning sign that the trend may be losing strength. However, the pattern forms in range-bound markets tend to be less reliable since price swings are common and don’t necessarily indicate a trend reversal.

The Hanging Man can produce false signals in high-volatility markets, as strong price fluctuations may create misleading long wicks. A deeper pullback might occur, but the uptrend could still continue. In low-volatility markets, the pattern can be more reliable, as a sudden shift in subsequent price action can signal a true change in momentum.

• Stop-loss placement: Above the high of the Hanging Man candle.
• Entry strategy: Traders wait for bearish confirmation (next candle closing lower) before entering short.
• Profit target: Use support levels or a risk-reward ratio (e.g., 2:1) to set a realistic exit strategy.

• Price breaks above the high: The bearish signal is invalid if the next candle closes higher.
• No bearish confirmation: Without follow-through selling, the pattern may just be a shakeout.
• Strong bullish trend continuation: A Hanging Man may appear in powerful uptrends but fail to trigger a reversal.

To use the Hanging Man systematically:

1. Identify an uptrend before the pattern appears.
2. Detect a Hanging Man with a small body and long lower wick.
3. Require confirmation: Enter short only if the next candle closes lower.
4. Set stop-loss above the high of the Hanging Man.
5. Backtest before trading range is live.

Always test historical data before committing real money to any pattern-based strategy.

Below is an AFL script to detect the Hanging Man in Amibroker:

// Hanging Man AFL Code for Amibroker

Uptrend = C>EMA(C,25); //Replace with your definition of an uptrend;

BodySize = Abs(Open – Close);

LowerWick = Min(Open, Close) – Low;

UpperWick = High – Max(Open, Close);

HangingMan = 

    Uptrend AND

    (LowerWick > 2 * BodySize) AND 

    (UpperWick < 0.1 * LowerWick) AND 

    (BodySize / (High – Low) < 0.3);

This script can be used in Amibroker to find Hanging Man patterns to incorporate them into your trading systems and marks them with a red star.

The Hanging Man candlestick pattern is a powerful tool to gain potential warning signs of a market trend reversal but is not a sell signal by itself. It forms after an uptrend and shows buyers losing strength, but traders should always wait for bearish confirmation before making decisions.

If you’re serious about using the Hanging Man pattern, backtest it on historical data before the adopting it into your trading strategy. Context, confirmation, and risk management make all the difference in trading.

Links to articles about other Candlestick Patterns

1. Doji
2. Hammer
3. Inverted Hammer
4. Bullish Engulfing
5. Bearish Engulfing
6. Morning Star
7. Evening Star
8. Shooting Star
9. Hanging Man
10. Piercing Pattern
11. Dark Cloud Cover
12. Three White Soldiers
13. Three Black Crows
14. Dragonfly Doji
15. Gravestone Doji
16. Spinning Top
17. Marubozu
18. Tweezer Top
19. Tweezer Bottom
20. Bullish Harami 
21. Bearish Harami
22. Rising Three Methods
23. Falling Three Methods
24. Bullish Abandoned Baby 
25. Bearish Abandoned Baby 
26. Bullish Kicker 
27. Bearish Kicker
28. Three Inside Up
29. Three Inside Down
30. Upside Gap Two Crows
31. Mat Hold
32. Upside Tasuki Gap
33. Downside Tasuki Gap