How To Analysis and Trade With Hanging Man Pattern

Advance Hanging man Pattern

In this blog, we are going to see about the Hanging Man Pattern, which is one of the Japanese candlestick charting techniques. We will deeply describe the Hanging Man Pattern formation, structure, theory, and techniques to analyze the pattern.

You will learn more about the Hanging Man Pattern in detail, which you could use in your trading technique. So read the full blog to get a better understanding of the pattern and techniques. Let’s dive into the concept.

Introduction of Hanging Man Pattern

The Hanging Man Pattern is a trend reversal pattern. It is formed on the High Trend in the chart. So the prior trend should be an uptrend. If this pattern is formed in the high trend, it has the possibility that this pattern will work 70% in the market.

Hanging Man has a small real body and a long lower shadow. The body of the hanging man should be 3 times shorter than the lower shadow or the lower shadow must be 3 times longer than the hanging man body. That is, if the body is 1 time the size means the lower shadow must be 3 times longer than the size of the body. For the bearish candle, the open price will be greater than the close price.

Note: If the candle of this pattern is in a bullish candle, it is not considered as a hanging man pattern. The reason for this will be explained in detail in the upcoming topic.

Structure of Hanging Man Pattern

Now we will see how the Hanging Man Pattern structure should be formed.

Structure 1 – OLHC

This structure tells about the presence of buyers and sellers in the pattern. On the open price, the sellers pushed the price down to the low price and then the buyers took control of the market and pushed to the high price, and again the seller came in pushed a little down and closed below the open price. This structure forms like a hanging man in the higher timeframe. So if this structure is formed inside the hanging man, the pattern has a strong possibility that it will work 80% and will give a sell signal as the market will move downside. We have to check this structure in the inner timeframe of the hanging man.

Structure 2 – OHLC

This structure forms like on the open price, the buyers pushed the price to the high price and then the sellers pushed to the low price, and again the buyers came in pushed a little up and closed below the open price. This structure forms like a hanging man in the higher timeframe. So this structure gives less possibility as that it will work in the market.

Note: We have to analyze the hanging man pattern in the higher timeframe. So you can check this pattern structure in the inner timeframe analysis. Hanging man pattern will be formed in all the time frames. It is necessary to check the pattern in a higher timeframe to analyze more and it gives more accuracy to trade.

Different scenarios in which Hanging Man can be formed.

Now we will be analyzing how the market will perform in this pattern. And how to analyze and take trade with this pattern.

The above image shows the different scenarios in which hanging man can be formed. We will see in detail about these patterns in the upcoming topics.

Why these 3 Bullish Hanging Man are Wrong

These 3 bullish candles are not hanging man because there is more buying pressure in these candles. These candles are bullish and the buyers pushed the price to the high price. So these hanging man patterns have very little possibility that it will work in the market.

Why this long lower shadow Bearish hanging man is wrong

This bearish candle is considered as hanging man pattern, but it is not recommended to trade in this candle. Because in this candle the lower shadow is too long almost 4 times the real body. So the buying presence is more. If we trade in this candle the possibility is only 50% that the trade will be win or loss based on the structure that we discussed earlier.

Why this 2 hanging man are Correct

Now these two bearish hanging man are perfectly formed. If these patterns are formed based on structure 1, then it has a high probability of getting the market reversed. Other than that if structure 2 is formed we can avoid that pattern as it gives less probability.

Theory of Hanging Man Pattern

Now we will be analyzing how the market will perform in this pattern. And how to analyze and take trade with this pattern.

As you see in the above image the hanging man formed in the high trend. Before the pattern formed there was an uptrend. You can see that the market has full control over the buyer and reached the high price. Then the seller came in pushed the price down, but the buyers fought and pushed the price up and close below the open like a bearish candle.

This pattern should be formed in a higher timeframe. Then we can analyze this pattern in the inner timeframe to check for structure 1. If this pattern is like the formation of structure 1, we have a high possibility that this pattern will work in the market. So we can take a Sell Entry in the next running candle.

Confirmation of Hanging Man Pattern

If the next candle of the hanging man breaks the previous support trend line, we can get confirmation that the market is going to fall. So we can short the market to make a profit.

Entry for Hanging Man Pattern

The Entry for the Hanging Man Pattern will be above the running candle (that is above the next candle open price of hanging man). If the previous candle’s upper shadow is longer than the hanging man, you can take an entry as shown below in 1.

Or If the previous candle’s upper shadow is shorter than the hanging man, you can take entry between the opening of the running candle and the previous candle high as in 2.

Then as shown above you can take sell entry, as the market will move downside according to our analysis.

Stop Loss for Hanging Man Pattern

The Stop Loss for Hanging Man Pattern will be the high price of the hanging man (2) or previous candle of the hanging man (1).

You can also make a Trailing Stop Loss (1) as the market goes below by drawing a resistance line as shown in the above image.

Steps to check before taking the entry with hanging man pattern.

Step 1: Search for the Hanging man pattern in the higher time frame.

Step 2: Check if the pattern is in a high trend and the prior trend should be an uptrend.

Step 3: Check the Hanging man structure –> it should be bearish –> the lower shadow should be 2 times or 3 times greater than the size of the body with perfect structure formation.

Step 4: Check the structure formation in the inner timeframe of the pattern. If you get the perfect structure move on to the next step.

Step 5: Set entry and stop loss level and execute the trade.

Step 6: Check for confirmation that the previous support line is broken, we also got the confirmation that it is on a high trend, and the structure formation of the hanging man both are perfect so the market will surely move down and we can make a huge profit.