Hanging Man Candlestick Pattern Explained & Backtested (2024)

The hanging man is a frequently-occurring, one-bar bearish reversal Japanese candlestick pattern that is best traded as intended across all markets.

If you’re a technical candlestick trader, you might be surprised to learn that while the traditional direction is correct, the recommended entry and exit leave much to be desired.

Keep reading if you are interested in executing the best hanging man trading strategy according to history.

What Is a Hanging Man Candlestick Pattern?

The hanging man is a frequently occurring one-bar bullish reversal pattern that’s best traded in the recommended direction.

The hanging man candlestick gets its name from the grotesque imagery that the candle looks like a man hung out to dry.

Most traders rightfully go bearish with this pattern but in the wrong way. But before we get into the best hanging man pattern trading strategy, let’s learn how to identify this single-bar pattern on our candlestick charts.

How to Identify the Hanging Man Candlestick Pattern

The following are the requirements for a valid hanging man candlestick pattern:

• Small real body with no to little upper shadow and a long lower shadow at least 2x the size of the real body.
• The hanging man occurs in an uptrend.

We see the hanging man candlestick pattern on the Apple (AAPL) June 16th, 2021, daily chart.

Price is above the fifty-day simple moving average, which we’re using as a proxy for a short-term uptrend. There’s a single candle with a small real body, a little upper wick, and a tail at least twice the size of the real body, fulfilling the pattern requirements.

Now that we know how to identify this single candlestick pattern, we can trade it on our candlestick charts.

How to Trade the Hanging Man Candlestick Pattern

The hanging man pattern should be traded as intended using a bearish reversal trade strategy using the high as a stop and the close as your entry expecting a significant risk-to-reward move in all markets tested, according to our 21-year backtest.

Hanging Man Bearish Reversal Trade Setup

The price is in an uptrend as it’s above the fifty-day simple. We see a small tiny upper wick, a small real body, and a lower shadow much larger than twice the size of the real body.

With the pattern identified, traditional traders enter short when the price moves below the hanging man’s low, setting a stop loss above the high.

This does lead to profits for these crypto traders, but there’s a much better way to trade these hanging man patterns.

Instead of going short at the low, data-driven traders enter short at a break of the hanging man candle’s close. As we can see in the above Bitcoin (BTCUSD) January 6th, 2018 daily chart, this led to significantly more profits.

Speaking of trading gains, what can history tell us about the best hanging man candlestick trading strategy?

Does the Hanging Man Candlestick Pattern Work? (Backtest Results)

I backtested the hanging man candlestick pattern on the daily timeframe in the crypto, forex, and stock markets using the following rules:

• A close above the 50-day SMA constitutes an uptrend.
• I tested risk-reward ranges from 1 to 5. 
• The optimal risk-reward ratio is selected using profit per bar.
• Entry and exits are discussed in the how-to trade section above.
• Confirmation must occur within three days of the pattern signal.

Similar Candlestick Patterns

Multiple candlestick patterns are often confused with the hanging man candlestick pattern. Understanding the varying candlestick requirements when using candlestick pattern technical analysis is essential.

Shooting Star vs. Hanging Man

The shooting star candlestick pattern is a close cousin of the hanging man. The difference between the shooting star and the hanging man is that their wicks are reversed. The shooting star has a large upper wick, a little real body, and little to no lower shadow, whereas the hanging man has little to no upper shadow, a little real body, and a large lower shadow.

Hammer Candlestick vs. Hanging Man

The hammer candlestick pattern is a one-bar bearish reversal pattern. The only difference between the hammer and the hanging man is that the hammer occurs in a downtrend and the hanging man occurs in an uptrend.

The Bottom Line

The hanging man candlestick is a frequently occurring one-bar bearish reversal pattern that is best traded bearishly, entering at the close and setting a stop loss above the high according to a 21-year backtest. The hanging man is one of the best crypto and forex candlestick patterns.