Trading asset classes like crypto and forex requires careful consideration of market trends and timely execution of the best strategy. One of the issues for traders of all experience levels is timing. An upward trend may seem like it will continue unabated, but, as we all know, what goes up inevitably comes down. 

The difficulty lies in predicting the size and timing of these changes in trajectory. 

One of the key points in the price evolution of an asset is the switch from a bullish to a bearish market, and there is an indicator that this may be about to occur: the Hanging Man candlestick. 

What Is A Hanging Man Candlestick?

The hanging man candlestick has little or no upper shadow, a small body where the high opening and closing prices are close to one another, and a long bottom wick that is typically at least double the length of the body. This important indicator can be either red (bearish) or green (bullish) and indicates the potential for a trend reversal.

While it is not proof that the reversal is already in progress, it is an indication that the bears are looking to overpower the bulls and that the reversal will soon occur. Noting the size and timing of a Hanging Man candlestick forms a crucial part of timing your trades when a reversal is fast approaching.  

Can A Hanging Man Candle Be Bullish?

A Hanging Man can itself be bullish, but it is important to note that this type of candlestick only occurs during the uptrend. It is a bearish suggestion and an indicator of a trend reversal. You may find it most helpful to focus on what the candle signifies rather than looking at whether the candle itself is bullish or bearish if you are a beginner.

Once you feel more confident in identifying the trend, the color of the candle will become more important as it contains information about the likely accuracy of the indicator. Although both indicate a bearish movement in terms of the upcoming price, a bearish Hanging Man (red) is considered stronger. 

The Formation Of A Hanging Man Candlestick

A Hanging Man typically forms when it appears that sellers have applied downward pricing pressure during the session, but that buyers were able to push the price back up so that it is close to the opening. This is an indicator that the larger upward trend that the asset has been on is slowing and about to reverse into a downward trend. 

While the height of the candlestick being compact is the first visual clue that the trend may reverse soon, the key feature is the long lower shadow. Because the shadow represents the dip in price during the session, it is a clear indicator that sellers are beginning to apply concerted downward pressure. The lack of any notable upper shadow shows us that there was little or no movement in the price beyond the initial opening price. What we are seeing is a clear loss of momentum that may well result in the reversal of the overall trend, although it is important to note that the occurrence of a reversal is not guaranteed. 

Using The Hanging Man Candlestick To Trade

Some traders choose to go short straightaway and pick the closing price of the Hanging Man as their entry point. They then use its high price to set a stop loss to manage risk. Others will wait for two or three more candles to close so that they can confirm the trend is occurring before making a trade. 

The point to note here is that you have the freedom to choose either approach and that the final choice will largely be determined by your perception of risk. The first approach — trading without waiting — is riskier but has the potential to offer a larger return if you can beat most of the market. 

Understanding that the Hanging Man is an indicator rather than a direct trading signal that the trend reversal has already occurred will help you to manage your personal risk exposure. There is always the chance that the bears and bulls may fight it out for a period of time, causing instability before a clear downward trend takes hold. 

The Psychology Behind The Hanging Man

When market psychology shifts so that buying pressure becomes overrun by selling pressure, the Hanging Man candle will form on the chart. Breaking down this shift into a series of key steps will help you to understand the specific mechanisms and drivers that are at play here: 

• Bullish momentum means the buyers are in control and are actively pushing up the trading prices 

• Selling pressure begins to grow during the trading session, and prices start to be driven down — this creates a long lower shadow 

• Weakening buyers can rally somewhat, but are unable to achieve the same price rises as they were before 

• Bearish confirmation typically happens during the next 2-3 candles, where traders will be looking to see if the closing prices start to fall 

It is common for buyers to look to take out their profits by closing their positions, which in turn adds to the selling pressure. Although the Hanging Man is by no means a guarantee of a trend reversal, it is a strong indicator that one is about to take place.  

Platforms like ThinkMarkets will help you confirm your strategy by providing access to other analytics and metrics. For example, if a bearish candlestick immediately follows the Hanging Man and closes below its body, the signal is significantly strengthened. You should then look for signs of increases in trading volume during this second candle to strengthen the potential for a trend reversal. 

The Importance Of Confirmation 

The Hanging Man can be a false signal that doesn’t result in a subsequent trend reversal. Efforts to confirm the new market behavior are often made by using a confirmation candle in the next trading window and checking whether or not it is bearish. This will provide a much stronger indication of whether a reversal is about to happen or you are just seeing a temporary pullback in the upward trajectory of the price. 

Looking in detail at the length of the downward shadow will provide a clear indication of the price volatility during that trading session. Even if the body of the candle appears healthy from a bullish perspective, the length of the shadow tells you about the level of pressure being exerted. Combining this data with trading volume insights will provide further indication of the prevailing market sentiment at a point where things look to be changing track. It is important to combine the Hanging Man with technical indicators like Fibonacci levels and RSI to manage risk and improve the probability of accurate confirmation.

Final Thoughts 

The Hanging Man is a notable visual indicator that prices in forex, crypto, and other asset classes may be about to experience a reversal. While not a direct trading signal, it is a first indicator of a change in market sentiment and an increase in bearish pressure. When combined with timely identification and careful confirmation using other metrics, the Hanging Man can serve as a starting point for a new trading strategy that takes advantage of an impending reversal in price trajectory.