The hanging man candle pattern is similar to a hammer pattern. The difference is this pattern is a bearish reversal pattern that occurs after the stock has a run up. This pattern does not appear often in daily stock charts. I prefer to use the topping tail as a bearish reversal signal than the hanging man which is not very reliable.
The picture below shows how the hanging man candlestick pattern looks like.
In order for it to be a valid hanging man pattern, the stock needs to have a run up for a few days. Then a small body with a long tail that is twice the size of the body appears. The stock usually gaps up and then as the day progresses sellers come in and push the stock lower. But the stock eventually moves back up and closes higher forming a tail.
One should take note that the hanging man pattern is not a sell signal in itself. A hanging man that appears after a run tells us that there are sellers who are coming in to push the stock down. The first wave of sellers are there but they were not strong enough to make the candle become a bearish red bar. You need to have confirmation of the pattern by having the price of the stock trade below the low of the hanging man pattern.
In my opinion, I do not think the hanging man pattern works very well. It is better to use the services of other bearish reversal patterns because the hanging man can be easily misinterpreted. But you can increase the accuracy of this pattern by looking for things such as:
If you see the hanging man appear in these areas, then the odds of it becoming a successful reversal pattern increases. Otherwise, I think you should ignore the pattern if it does not happen at these areas.
In the chart above, ALXN had a bullish run in early January. As it reaches the previous high which acted as resistance, the stock formed a hanging man pattern. The next day, another hanging man pattern formed. Sellers were already coming in to sell this stock as it nears the resistance area.
However, it was not able to form a bearish red bar because of the bullish momentum that is still attached to this stock. On the 3rd day, the stock price fell below the low of the 2 hanging man patterns and this confirmed the bearish signal that the hanging man pattern gave us. The stock slowly drifted lower.
In the chart above, you can see how ECL had a nice bullish rally in early December. As the stock hit the old highs, a hanging man pattern formed. A hanging man pattern that forms at resistance area is more reliable than one that forms in the middle of a move.
The next day, the stock fell below the low of the hanging man and this confirmed the bearish signal. The stock slowly drifted lower in the next 2 weeks.
The above two charts show a very good example of how the hanging man pattern can hint of a reversal. I do not like to use this pattern as it seldom happens in a stock. But when you do see this pattern always remember to have it happen at a resistance area or if an indicator like stochastics is showing an overbought level. That way, the signal that this pattern gives is more reliable.
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