Hanging man candle

A hanging man has exactly the shape of a hammer: a small body near the top of the candle with a long wick hanging below it. The lower wick should be at least twice the body, and the upper wick either absent or very short. The difference is location. A hammer forms at the bottom of a decline; a hanging man forms at the top of a rally.

Here's what happened inside it: in the middle of a rally, sellers suddenly pushed price down hard. Buyers stepped in, reclaimed most of the drop, and the close landed near the high. On paper the buyers won. But sellers who were nowhere to be seen during the whole rally managed to push that far for the first time, and that's a warning.

So a hanging man is a sign of fatigue, not a reversal. Buyers can still hold the close on their side, but they are straining for the first time. On its own it's known as a weak warning; the level it forms at and the candle after it decide what it means.

Measure first. Say a one-hour EURUSD candle opens at 1.1040, rises to 1.1045, drops to 1.1018 and closes at 1.1043. Body 3 pips, lower wick 22 pips, upper wick 2 pips. The lower wick is seven times the body and the upper wick is short. With a rally before it, that's a hanging man.

Then look at the location. Did it form at resistance, a previous high or the top of a range? A hanging man means something where buyers would be expected to struggle anyway. Far from any level, the same candle is usually just a wiggle.

With a hanging man, confirmation is close to mandatory. Wait for the next candle to close below the hanging man's body, 1.1040. A close below the wick's low, 1.1018, is stronger: the ground buyers reclaimed on the previous candle now belongs to sellers.

The logical stop sits a little above the hanging man's high. With the high at 1.1045, the stop goes near 1.1048. Selling after a confirmation candle closes at 1.1030 means 18 pips of risk; that distance is your 1R. Wait for a close below the low and your entry drops under 1.1018, pushing the risk past 30 pips.

Mistaking it for a hammer. A long lower wick and a close near the high look positive, so beginners buy it at the top of a rally. But the same shape says selling ran out at a bottom and sellers woke up at a top. Look at the twenty or thirty candles before it before you name it.

Treating it as a reason to sell on its own. A hanging man closes near its high, which means buyers are still ahead when it closes. Selling on that candle alone puts you against the side that just won. Only the next close shows whether sellers have really taken over.

Putting the stop at the wrong end. The hanging man's long wick points down, but the sell idea fails up top, at the candle's high. The stop goes where the idea is invalid, not wherever the wick suggests.

Hanging men show up often in strong trends, and the trend often carries on. If the higher timeframe is still making higher highs and higher lows, a hanging man on the small chart is usually a breather. If the next candle closes above its high, the warning is void.

During a major data release, price can drop and recover within seconds. That wick doesn't show sellers gaining ground at the top; it shows orders emptying out all at once.

Check the room below too. If strong support or an old broken resistance sits just under the hanging man, there isn't much space to fall. An 18-pip stop against a first obstacle 12 pips away is under 1R before the trade starts.