Hanging man candle is a reversal candlestick chart pattern that signals the reverse of existing uptrend in stock trading. This candlestick chart pattern indicates the bearish signal for stock trader. Trading strategy for hanging man candlestick chart pattern is influenced heavily by the confirmation of the pattern and other technical analysis indicator.
Formation of hanging man:
1. Long lower shadow: Hanging man candle has long lower shadow. Long lower shadow should be at least twice the body of the candlestick. Long lower shadow actually indicates the control the of bull in the market and shows that bull regain its position as stock price started to fall down. Even though candlestick show the control of bull in the stock trading, but it also shows the weakness of the bull because long lower shadow means price was once controlled by bear and later regained by bull at the end of the day . This pattern is not working until once get the confirmation candle next day.
2. Body of the candlestick: body of the hanging man candlestick should be small and at the top portion of the candlestick. That means no upper wick or close to zero or minimum upper wick or shadow.
3. Color: Color of the hanging man candle body can be either red or green, it does not matter. However, red body candle is more preferable than green one.
4. Resistance line: This candlestick chart pattern works better if Hanging man candlestick pattern appears in the major resistance line.
Pattern recognition for Trading:
1:Existing Uptrend: Hanging man candlestick chart pattern appears at the end of the uptrend. Usually this pattern signals the end of possible uptrend.
2: Volume: stock volume is average or low is ok at the hanging man day. AS this is the day of uncertainty between bull and bear.
3. Confirmation: Stock should have a big volume in the next day to confirm the hanging man candlestick reversal. Second day a big red candle that will engulf the entire previous day candlestick and will be closed below the low of that candlestick is a strong confirmation for the stock trader. Sometime stock gaped down next day closed below the hanging man candle. This is also confirmation for the stock chart. Another scenario is that stock gaped down big next day and tried to recover the price stock lost during the day . But as price moved up to the low of the hanging man candlestick, big sale off started and stock closed below the low of the opening price. This is also another confirmation for this pattern. In the ADM chart, hanging man candlestick was engulfed by a red candlestick next day.
Trade setup for hanging man candlestick chart pattern:
Entry to the stock trade of hanging man candle:
Trader will enter the low of the hanging man candle. Best is wait for the next day and watch how next day candle is formed. If next day candlestick is closed below low of the hanging man candle, day trader should get into the stock trade and hold it until the stock went down to the target price of the trader. In the ADM char, entry is shown by the blue line. If price broke down the blue line, entry will be triggered and stock trader will buy stock. But best is wait for the confirmation candlestick and watch how volume is formed.
Exit the stock trade of hanging man candlestick chart pattern:
Trader should exit the stock trading if price goes back to the high of the hanging man and closed above the high of the hanging man. Exit to the is important at this point because as price moved up above the high of the pattern that indicates bear lost the control of the stock and bull took the control of the stock . This also signal that uptrend presumed and bearish signal was fake and bearish trader are trapped. Yellow line in the ADM chart shows the stop loss point of the pattern and stock trader should exit the trade as stop loss point is triggered.
Reliability of hanging man candle:
This candlestick pattern reliability is moderate.
Bottom line: This pattern is same like hammer candlestick except the position of the hanging man candle. If this pattern is appears in the top is called hanging man, otherwise this pattern is hammer candlestick. That’s why confirmation is very important for day trader to get into this trade and buy the stock. Best thing is use this candlestick chart pattern with other technical analysis indicators like stochastics in the overbought conditions, moving average, support, resistance, volume etc. will give more reliable trade setup than use this candlestick pattern alone.