The Hanging man is actually a Hammer at the top of a rally. It’s a bit dubious that the same candlestick pattern is both bullish and bearish. But let’s explore it more thoroughly so we can understand the traders’ psychology during its formation.

Well, during an uptrend, the opening of a new candle the bulls fail to pull prices higher but instead, sellers take control to push them lower. This is an indication or warning that the bulls are running out of steam as indicated also by the long lower shadow. Eventually, something happens and prices bounce up to close at the upper part of the candle.
Now, what makes this candle bearish is the inability and weakness of the bulls to register new highs.

Now, let’s take a look closer at the characteristics or specifications of the Hanging Man.

  1. It has a long lower shadow.
  2. It has a very small or no upper shadow at all.
  3. The body may be bullish or bearish, black or white.
  4. The body is small.
  5. The lower shadow is 2 to 3 times the height of the body.

What is very important to understand is that a prerequisite for this reversal is the existence of a rally or an uptrend. I would personally like to see at an all-time high area after a strong rally. Great!

Now that we cleared that up let’s see the sell setup. After the formation of a Hanging Man, a potential sell order would be right below the low price of the candle. Some traders would even place a sell order right below the closing price in an attempt to minimize their potential risk. It goes without saying that a protective stop loss should be in place. Where?

Well, I prefer right above the high price of the candle. Just a small note before I let you know. Some technical analysts would wait for a close below the Hanging Man before they enter with a sell order. The reason behind that is that they believe that this way they will increase the probability of a decline. On the other hand, what if the candle is really long? The comments are yours.

See you in a while.