BEARISH HANGING MAN
Definition
The pattern occurs at the top of a trend or during an uptrend. The name Hanging Man comes from the resemblance of the candlestick to a hanging man. It is a single candlestick pattern characterized by a long lower shadow and a small body at or very near the top of its daily trading range.
Recognition Criteria
1. The market is characterized by a prevailing uptrend.
2. A small real body is observed at the upper end of the trading range. The color of the body is not significant.
3. The lower shadow of this candlestick is at least twice as long as the body.
4. There is (almost) no upper shadow.
Pattern Requirements and Flexibility
The body of the Hanging Man should be small. The lower shadow should be at least twice the length of the body, but not shorter than an average candlestick. Ideally, the upper shadow should be very small, or better yet, nonexistent. The top of the Hanging Man’s body should be above both of the two preceding white candlesticks.
Trader’s Behavior
The Hanging Man is a bearish reversal pattern that signals a market top or resistance level. Appearing after an advance, it indicates increasing selling pressure. The long lower shadow shows that sellers pushed prices lower during the session. Although bulls regained control and drove prices higher by the finish, the presence of this selling pressure after a rally serves as a serious warning signal. If the body is black, it indicates that the close was below the opening price, which has potentially more bearish implications.
Sell/Stop-Loss Levels
The confirmation level is defined as the midpoint of Hanging Man’s lower shadow. Prices should cross below this level for confirmation.
The stop loss level is defined as the higher of the last two highs. Following the bearish signal, if prices go up instead of going down, and close or make two consecutive daily highs above the stop loss level, while no bullish pattern is detected, then the stop loss is triggered.