There are a lot of misconceptions concerning the Hanging Man candlestick pattern.
Although it is one of the most popular single candle patterns out there, it is also incredibly misunderstood.
While the Hanging Man is widely regarded as a bearish trend reversal signal, but according to Bulkowski’s testing, the Hanging Man pattern is actually a bullish continuation pattern approximately 59% of the time.
According to Bulkowski, the creator of the Chart Pattern Encyclopedia, any candlestick pattern with a performance under 60% is basically “near random.”
The opposite of the Hanging Man pattern is the Hammer candlestick pattern.
The Hanging Man candlestick pattern can be found virtually on any chart type under any time frame.
With this said, always keep in mind when spotting a Hanging Man that it frequently acts as both a bearish reversal and bullish continuation pattern. Stop losses and sell orders should be placed just outside the length of the candle on either side, depending on the context of the underlying trend, price action, and whatever other variables account for your trading strategy.
The Hanging Man candle appears as a bullish candle with a long lower wick, no upper wick, and a short body.
In the context of market participation, the Hanging Man pattern forms after a sell-off by bears, followed by a retracement from the bulls that causes the candle to close slightly above the opening price.
The initial sell-off that gives the Hanging Man a long lower wick indicates that buyers are losing control of the current trend and that the asset’s price may soon be waning downwards.
The Hanging Man candlestick pattern is one of the most commonly used trading patterns utilized by price action day traders.
Just keep in mind that a Hanging Man is just as likely to be a trend continuation sign as it is a bearish reversal.
Beginning traders should apply caution when trading this candlestick.