Hanging Man Pattern –
Hanging Man is a single candlestick bearish reversal pattern which helps to identify reversal pattern from bullish to bearish. This pattern forms during the uptrend but there is no assurance of that. Hanging man and hammer are similar in pattern the only difference is that hanging man forms during uptrend and give sign of bearish trend and hammer forms during downtrend and gives sign of bullish trend.
The opening, closing and high price of candle is approximately same means short body, little or no upper wick and long lower wick twice as that of body. Color of the candle doesn’t matter.
If we observe this candle, we can see the candle open higher or same as previous close, then the price starts falling but at the end of that day the price recovers and closes approximately same to the opening price. This means bears pushes price down after opening but somehow bulls wins the battle and pushes price up. so the message comes from this is that the bears are entered in that stock or index, so there is possibility of trend reversal.
In above chart, hanging man pattern in shown by using blue circle. This pattern is useful for short term. As we can see the uptrend was going on before forming the this candle. Some traders use this pattern to take trade. Traders go short on next bearish candle when the candle breaks low of hanging man, they put stop loss above the high of hanging man candle and set target of next support or according to their risk reward.
In above chart, we can see after formation of hanging man, the price declined sharply. prior trend was bullish, then formation of this candle and then price declined. So use this pattern with stop loss because there is no assurance that it is going to work always, so stop loss is always there for us to protect our capital.