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How to use hanging man candlesticks

In Trading

The hanging man is a candlestick that indicates a potential price reversal at the top of an uptrend.

A hanging man is not as bearish as a shooting star, so it’s more common to see hanging man candlesticks before short term corrections.

Here’s what a hanging man looks like:

If you recognize this candlestick from one of our previous posts, you’re right. The hanging man candlestick looks identical to the hammer candlestick.

The difference is that a hammer occurs at the bottom of a downtrend, while a hanging man is found at the top of an uptrend.

Like the hammer, a hanging man is characterized by small body with a long lower wick that is at least twice as long as the body.

A hammer’s upper wick is either very small or nonexistent.

From a market psychology perspective, a hanging man indicates a large sell-off by the bears before bulls are able to push price back up to the candle’s open price before the end of the trading session.

Since a hammer is typically preceded by large bullish candles, the initial sell-off that prints the long lower wick is perceived at bulls losing control.

At the same time, a hanging man can also indicate that bulls are simply waiting for some kind of reaction from bears before continuing the upward trend. This is exactly why a hanging man is nowhere near as bearish as a shooting star.

If you’re looking to trade hanging man price action, it’s best to aim for short term corrections with a stop loss order set.

Examples of hanging man candlesticks

On the 4-hour BTC/USD chart below, a hanging man can be seen in the green box. Notice the long lower wick coupled with the relatively small body.

In this case, a bullish move from USD3,630 to USD4,115 is followed by a doji candlestick which indicates indecision or neutrality.

The hanging man that prints after the doji indicates that bears are gaining control and a reversal may be imminent.

Following the hanging man candlestick, the price of BTC makes a 10% move downward to USD3,510.

On this 1-hour XRP/USD chart, a hanging man can be seen after two large bullish candles.

Once again, notice the small body coupled with a long lower wick. The fact that this hanging man occurs after a huge upward candle was bad news for the bulls.

In most cases, a large bullish candle acts as a catalyst for more bulls to join the session.

However, the chart shows a situation where bears quickly take control to push price down, forming the lower wick.

After the hanging man, XRP makes a 4.6% move to the downside before bulls step in rally up for another resistance test.

A hanging man candlestick is a valuable indicator for spotting potential price reversals to the downside.

Since hanging man candlesticks are not as bearish as shooting stars, they should be used with fairly tight stop losses, and you should always be ready to flip your bias if a hanging man turns out to be just a continuation candle for bulls.

As shown in the examples above, hanging man candlesticks are very important if they are preceded by large bullish moves or a doji candlestick following a bullish move.

 

 

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

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