Trader watching at a platform. Image source: Simple FX, flickr.com
This article is the second entry in our series of materials covering the structure and functioning of various types of candlesticks. You can check out our first article, which examined the nature of Shooting Stars and Hammers here.
Despite the somewhat morbid-sounding name, the Hanging Man is a type of candle that is an integral component in the know-how of every chart artist. It is so vitally important not only because it appears quite often on charts with different timescales, but also because it can corroborate a trader's forecast about the likely future behaviour of a given asset's price action.
Structure and Significance
The Hanging Man typically has a tiny body, little or no upper tail and a long lower tail. Essentially, it has the same structure as the Hammer candlestick, which is also indicative of likely trend reversals.
The structure of the Hanging Man is represented in greater detail on the image below, which is taken from our trading book - Bulls, Bears and Sharks. In it, you can find additional information about the most popular types of candlesticks.
Hanging Man Image.
The essential difference between the Hammer and the Hanging Man is that unlike the former, which is typically found near the bottom of a recent downtrend, the latter is most commonly observed at the peak of an underlying uptrend.
With regards to the manner in which it gets established, the Hanging Man resembles more closely a Shooting Star. Both are indicative of changing buying and selling pressures, with the only discernible difference being the two candles' tails.
While the Shooting Star has a huge upper tail, which indicates waning buying pressure, the Hanging Man has a long lower tail. It signifies an early attempt at mounting selling pressure. In other words, the emergence of a Hanging Man near the peak of a recent uptrend signals the execution of more selling orders in anticipation of a reversal.
While it is true that candles with small bodies and huge tails are typically indicative of growing uncertainty in the market, the Hanging Man, a characteristically contrarian type of candle, can be perceived as an early signal of a subsequent reversal.
Hanging Man Candles in Practice
The hourly chart below studies the emergence of several Hanging Man candles at crucial junctions on the latest price action of GBPUSD. If you want to learn more about the current trading outlook on the pair, you can check out our newest comprehensive analysis.
GBPUSD 1H Price Chart. Image source: Trendsharks ©, created with TradingView.com
The first Hanging Man can be found in an established upswing. In hindsight, we now know that the price action continued appreciating following its development, which would have been harder to discern at that time.
That is why it is so crucially important to have other pieces of evidence to corroborate your market expectations. Otherwise, you risk falling victim to such misleading Hanging Man candles, such as the second Hanging Man.
The third Hanging Man occurred near the upper boundary of a consolidation range, which stemmed from the preceding upswing. Since ranges typically separate trends/swings with different directions, the emergence of a Hanging Man at this point makes more sense. The range itself corroborates the expectations for a subsequent reversal. Unsurprisingly, the price action created a sizable downswing next.
Finally, we arrive at the fourth and final Hanging Man, which occurred just several hours ago. Since the price action has not been able to penetrate much higher than the range in all of that time, a potential continuation of the downtrend further down south makes more sense.
Concluding Remarks
The Hanging Man is a type of candle that implies probable bearish reversals. It works best when its selling signals can be corroborated by additional bearish occurrences around the same time.
Similarly to Shooting Stars and Hammers, the Hanging Man should not be viewed as a comprehensive signal in itself. Rather than viewing it as a decisive piece of evidence, traders can try to perceive its emergence as being demonstrative of the underlying buying and selling pressures at that time.
In other words, candlesticks suggest the likely nature of the underlying market sentiment at the time of their development, which should not be misconstrued as being definite signs of the future direction of the underlying price action.
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