Hanging Man

Trading can feel a lot like walking through a haunted house—you never know when the next spook is going to jump out at you. But what if you had a way to sense those scares coming? That's where candlestick patterns like the Hanging Man come in handy. This particular pattern can act as a warning sign that bullish momentum is about to take a nosedive.

What is the Hanging Man Pattern?

The Hanging Man is a bearish reversal candlestick pattern that forms after an uptrend. It consists of a small real body near the low of the candlestick with a long lower wick—giving it the appearance of, you guessed it, a hanging man.

The Hanging Man shows up fashionably late to the uptrend party, only to put a damper on the fun.

How to Identify the Hanging Man

Here are the criteria for spotting a valid Hanging Man pattern:

• Uptrend: The Hanging Man should form during an upward price movement.
• Small real body: The real body (open to close range) should be relatively small, with no specific size requirement.
• Long lower wick: The lower wick (the thin line below the real body) should be long, typically at least twice the length of the real body.
• Little or no upper wick: There should be little to no wick protruding above the real body.

It's worth noting that the color of the real body doesn't matter for the Hanging Man—it can be green (bullish) or red (bearish). The pattern gets its bearish implications from the long lower wick, which suggests that sellers stepped in and overwhelmed buyers during the uptrend.

How to Trade the Hanging Man

The Hanging Man is considered a potential reversal signal, but it's not a guarantee that prices will immediately start tanking. Here are a few tips for trading this pattern:

• Wait for confirmation: Don't jump the gun and go short just because you spot a Hanging Man. Wait for the next candlestick to close below the low of the Hanging Man's real body to confirm the reversal.
• Set a stop-loss: If you do decide to initiate a short position, make sure to set a stop-loss above the high of the Hanging Man candlestick to limit potential losses if the pattern fails.
• Consider the bigger picture: As with any technical pattern, the Hanging Man should be evaluated in the context of the broader market environment and other technical indicators.

Remember, the Hanging Man is just one piece of the puzzle when it comes to trading. Use it as a potential signal to be aware of, but don't treat it as a guarantee of impending doom for the uptrend. Keep an open mind, manage your risk, and always be prepared for the unexpected twists and turns of the market haunted house.