I know what you are thinking. You are thinking that I'm just kidding because you have seen this pattern
five minutes ago and I have introduced the pattern with another name, that is hammer. The hanging man has
the same shape as the Hammer
and actually the first five conditions are the same.
It's only the last one that is different.
In fact the hanging man appears when the market is in an uptrend. Does it make a huge difference?
Let's find out.
Here we have Eurodollar on a four hour chart, I have highlighted in green
all the candlestick that have the same shape of a hanging man but that do not respect the last condition.
That means that they appear when there's not a clear uptrend.
So we are not going to take them as hanging man. In yellow,
you can see the candles that respect all the conditions and so they need to be considered as hanging man.
The best thing to do to verify the strength of this pattern is to analyze the price action before the
pattern;
the price action of the pattern and then combine them and draw our conclusions.
Let's analyze the price action before these two hanging man in yellow. In previous sessions,
the price was going up so there was a clear uptrend before that
the hanging man appears. The hanging man, as a single candle, tells us the same information of the hammer.
The session starts with sellers in control that push the price down.
Then buyers appear and they manage to push the price up,
closing the session near the opening price.
So at the beginning of the session, sellers were in control. By the end of the session,
buyers are in control.
Combining the two analysis, we can say that buyers are in control on the market,
then with the hanging man, sellers attempt to change the trend,
pushing the price down. But buyers react and then the price goes up again.
So at the end of the session that defines the hanging man,
the buyers are in control, not the sellers.
This analysis for me is enough to let me say that I don't recommend to use the hanging man.
I don't want to open short positions on a candlestick that is telling me that the buyers were stronger
than the sellers by the end of the session.
But why traders consider the hanging man
a good reversal pattern?
The first reason is that they see the hanging man as the first trace of sellers on the market.
After all the hanging man is saying that after many bullish sessions, the sellers finally made their move
to push the price down, even if the buyers reacted very well by the end of the session.
The second reason, and from my point of view this is the most important one, is that many traders apply
candlestick patterns the way they study them in the books, without really understanding the logic
behind the pattern.
Don't get me wrong, I don't want to say that I'm the only one who understands candlestick patterns.
There are so many traders better than me out there.
But when I was a moderator for a Forex Forum, I have seen many traders or aspiring traders reading the charts
as if they were selling something on the street market. "Hammer here, hanging man there.
Another hammer here,
let's buy it,
let's sell here on the hanging man".
This is not the way I want you to trade.
I want you to understand every single pattern in order that you will be able to analyze the market with
your brain,
even if you don't remember the name of the patterns.