A hanging man is a bearish candlestick pattern that forms at the end of an uptrend. It is created when there is a significant sell-off near the market open, but buyers are able to push this stock back up so that it closes at or near the opening price. Generally, the large sell-off is seen as an early indication that the bulls (buyers) are losing control and demand.
It is a reversal candlestick pattern with long lower shadow and no upper wick. It is a simple candlestick pattern made of a single candleline. They are bearish in nature and appear at the end of an upper trend. It has its name because of its resemblance to the hanging dead man. It may also mean that if you do not respect this signal and still hold on to the position, then you are a dead man.
A hanging man candle is identical to the “hammer” candle in its shape but forms at the top of an uptrend indicating a price peak and potential reversion/reversal. While it is traditionally considered a bearish candle, it can also be a continuation candle that sucks in short-sellers and bears and then proceeds to squeeze the price higher. When a pattern becomes too familiar or expected, the market will often form the opposite reaction. This can be expected in a minus sum environment like the financial markets. Therefore, hanging man candles must be approached with several confirmation indicators to determine if it is a bearish reversal signal or a bullish continuation signal in each scenario.
Formation of Hanging Man Candle Pattern
A hanging man typically appear at the end of an up trend. They have a small real body at the upper end of the candle. The body may be red or green. They have a long lower wick which is double the height of the real body. The upper wick may be absent or very short.
It is formed because of the bears not allowing the bulls to push the price high. The stock is in an up trend and at a crucial resistance level. After opening high the sellers push the prices down by over supplying the stock. It is accompanied by profit booking.
But later in that time period the buyers increase in number and the demand for the stock increases. The price moves up and closes near the opening, either just below or just above the opening price