What is a Hanging Man
A hanging man is a
shape that often appears at the end of an uptrend. It has a short real body, little or no upper wick and a long lower wick.
Breaking Down Hanging Man
A hanging man represents a large sell-off early in the trading day, which sends the price plunging, before buyers push the price back to somewhere near the opening price. Investors often read a hanging man as a sign that the bulls are beginning to lose control and that the asset may soon enter a downtrend.
A hanging man also be part of a continuation of the bullish trend. In that case, the hanging man tells the story of a large number of bears dumping their stock too early and short-sellers picking the wrong time to short.
The Ideal Hanging Man Shape
The ideal hanging man has a small body, little or no upper wick and a lower wick at least twice as long as the body. A hanging man may be a black or white candlestick. The color can affect how some investors interpret them, but it is the least significant element of the hanging man.
More definitive than color is the candlesticks relationship to the preceding candlesticks. In fact, the difference between a hanging man and a hammer lies entirely in its relationship to prior candlesticks. While a hanging man sits at the end of an uptrend and usually signifies a reversal toward a bear market, a hammer sits at the end of a downtrend and usually signifies a reversal toward a bull market.
When a Hanging Man Signals a Bearish Reversal
A hanging man more likely signals a shift in market sentiment that will result in a downtrend when preceded by several white candlesticks, each closing higher than the last, and followed by a black candlestick closing below the body, or even the lower wick, of the hanging man. Aggressive, or antsy, traders may not look for as many confirmations before liquidating their positions or going short after a hanging man, exchanging certainty for a chance at greater gains or smaller losses.
The higher the trading volume and the longer the lower wick relative to the body, the more bearish the hanging man.
In either case, the hanging man more often represents a short-term downturn in price. They appear less frequently before long-term downtrends. Therefore, they are of more interest to day traders than to long-term investors.