The ‘Hanging Man’ is a bearish reversal pattern at the top of a bullish market. Its body could either be black or white the more salient feature its size. The body of a ‘Hanging Man’ is small compared with the size of its tail, its name derived from the image of a person hanging by the edge of a cliff legs dangling. Although the graphic appears to suggest we should look for a big drop this is considered to be a low level pattern as in real life the man hanging by edge of the cliff may be able to pull himself up.
Technical Description
1) The preceding trend must be bullish.
2) The latest candlestick opens with at least a body gap on the upside with a very small wick, or at the high.
3) The body of the Hanging Man should be small, either black or white and no more than a third of the its range.
4) Price action for the period should see a long tail develop ideally more than half the average range for the time frame.
Mark’s Perspective
‘Hanging Man’ patterns are more effective when the body of the candlestick is black. A white body should be considered more a sign of weakening up trend instead of a reversal signal. Generally speaking longer tails are preferred as they suggest greater bear power. To trade shorts must be taken only if the latest candlestick has gapped lower at the open or when we can confirm the change of sentiment with a black body and a lower close. Stop losses must be placed above the high of the candlestick.