The hanging man pattern and the hammer candlestick formation look exactly the same, but their interpretation is completely different.

In this article, we will walk you through the hanging man candlestick pattern.

What is a hanging man?

A hanging man is a single candlestick pattern used in technical analysis to signal the potential reversal of a bullish trend

The formation has a small real body, a long lower shadow, and little or no upper shadow.

The hanging man and the hammer candlesticks look identical, but they appear in different contexts.

A hanging man generally occurs at the end of an uptrend and warns a possible peak nears. On the other hand, a hammer forms at the end of a downtrend and signals a possible bottom is approaching.

How does a hanging man occur?

A hanging man generally occurs during an uptrend when buy-side volume is outpacing sell side volume.

The long lower shadow of the pattern shows that the bears have pushed the price down significantly during the trading session.

The bulls then step in and drive the price back up to close near the opening price, creating a small real body on the candle.

Some traders view the large sell-off during the session as a sign of a potential trend reversal. The price may soon enter a downtrend.

How to identify a hanging man？

The following features may help you identify a potential hanging man pattern:

• Clear uptrend

There should be a clear uptrend before the pattern. An uptrend means the price makes higher highs for a certain period.

• Lower shadow at least two times the body

The candle's lower shadow should be at least two times the length of the body, while there is little or no upper shadow on the candle.

• Small body (either bullish or bearish)

The real body should be small. The color of the body does not matter. It can either be a bullish or bearish candle, though a bearish candle suggests a stronger bearish bias.

• Pattern confirmed if the next close is below the body

The hanging man pattern is considered to be confirmed when the next trading session closes below the hanging man’s real body. The pattern fails if the opposite is true.

Case study

The chart below shows a hanging man candlestick pattern of Starbucks (NASDAQ: SBUX) formed in July 2021.

• The stock was in a clear uptrend in early July 2021.

• On the day the hanging man was formed, the stock opened high at first, but the bears came in and pushed the price down significantly during the session, creating a long lower shadow.

• Then the bulls stepped in and drove the price back up. The price finally closed slightly below the opening price, forming a small real body.

• On the following trading day, the price opened a gap lower and closed below the real body of the hanging man candlestick, and thus the pattern was considered confirmed.

• After that, Starbucks' stock moved lower in price.

Summary

A hanging man candlestick can be a useful tool for traders to identify a potential exit.

However, the pattern may not always work, and sometimes it can fail.

Like all technical tools, investment decisions should not be solely based on a single indicator. The hanging man should be used in concert with other signals and indicators.

This presentation discusses technical analysis, other approaches, including fundamental analysis, may offer very different views. The examples provided are for illustrative purposes only and are not intended to be reflective of the results you can expect to achieve.

All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.