Definition - Occurring at the very top of a trend or during an uptrend, the name itself come from its appearance. As just one candlestick, it boasts a long shadow and a small body - normally, this will be near the top of the trading range.
- Although the colour of the body is not relevant, the body must be small when it appears in a market that is experiencing a prevailing uptrend.
- In terms of the lower shadow’s length, it should be around double the size of the body.
- With the upper shadow, this is small to non-existent.
Patterns and Flexibility
As mentioned, the lower shadow needs to be double the size of the small body at least but it should never exceed the size of an average candlestick. In a perfect scenario, the upper shadow will not be seen but it will always be small at least. Looking at the pattern, traders should see that the top of the Hanging Man’s body is above the two white candlesticks that preceded it.
Behaviour of Traders
As a bearish reversal pattern, the Bearish Hanging Man is a signal of a resistance level or market top. Overall, it suggests that selling pressure is steadily rising because it is experienced after an advance. With the long lower shadow, this shows traders that the sellers are pushing the prices lower during trading. Despite the efforts of the bulls to regain control and the price closing high, the warning signal has already been sent via the selling pressure. When the price cannot reach the opening price at close, the body will be black which will strengthen the bearish signals.
Sell/Stop Loss Levels
For there to be confirmation, the prices need to cross below the confirmation level which, in this case, is considered to be the midpoint of the lower shadow. With the two highs, the higher option will be used as the stop loss. If the prices rise following the bearish signal, the stop loss will be triggered if two consecutive highs are seen above the stop loss level - this is assuming there is no bullish pattern.