Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30 years of stock market experience and widely regarded as a leading expert on chart patterns. His four books, including the best selling Encyclopedia of Chart Patterns, have been translated into seven languages. He may be reached at

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Bulkowski's Hanging Man

Market

Industrials (^DJI):

Transports (^DJT):

Utilities (^DJU):

Nasdaq (^IXIC):

S&P 500 (^GSPC):

As of 02/06/2012

12,845 -17.10 -0.1%

5,334 -34.68 -0.6%

450 -1.41 -0.3%

2,902 -3.67 -0.1%

1,344 -0.57 0.0%

YTD

5.1%

6.3%

-3.2%

11.4%

6.9%

Tom's Targets Overview: 02/03/2012

13,100 or 12,400 by 02/15/2012

5,500 or 5,150 by 02/15/2012

470 or 440 by 02/15/2012

3,100 or 2,800 by 02/15/2012

1,375 or 1,300 by 02/15/2012

Test Portfolios and CPI

Indus. strength: 1.8%

Mutt Losers: None YTD

Mutt Winners: 2.3%

Wilder RSI: None YTD

CPI:

on 12/20/2011

In my book, Encyclopedia of Candlestick Charts, pictured on the right, I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines in the tests.

The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines, performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators), and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy by clicking on the above link.

The hanging man is probably one of the better known candlestick patterns, but it does not work as many expect. Candle theory says it acts as a bearish reversal of the prevailing price trend, but my tests show that it is really a bullish continuation 59% of the time. Of course, that is what I call "near random." The hanging man appears frequently in a historical price series, but the trend after the breakout is dismal, ranking 87 out of 103 candle patterns where 1 is best.

Important Results

Discussion

Identification Guidelines

Three Trading Tidbits

Example

Hanging Man Important Results

Theoretical performance: Bearish reversal

Tested performance: Bullish continuation 59% of the time

Frequency rank: 16

Overall performance rank: 87

Best percentage meeting price target: 86% (bear market, down breakout)

Best average move in 10 days: -3.60% (bear market, down breakout)

Best 10-day performance rank: 59 (bear market, down breakout)

All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts.

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

Hanging Man

Hanging Man Discussion

The hanging man candlestick is a popular one, but one that shows lousy performance. In theory, it is supposed to be a bearish reversal but it actually is a bullish continuation pattern 59% of the time. The best performance that it can muster is after a downward breakout in a bear market. Price drops an average of 3.60% in 10 days, ranking it 59 for performance. That is just mid list. Outstanding performance would be a move of 6% or more.

Hanging Man Identification Guidelines

Characteristic	Discussion
Number of candle lines	One.
Price trend leading to the pattern	Upward
Configuration	Look for a small bodied candle atop a long lower shadow in an uptrend.

Hanging Man: Three Trading Tidbits

If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book where the tips appear.

Hanging man candles that appear within a third of the yearly low perform best -- page 368.
Hanging man candles taller than the median show price that moves 50% farther after the breakout than those shorter than the median -- page 368.
Hanging man candlesticks within a third of the yearly high tend to act as continuations of the primary price trend -- page 370.

Hanging Man Example

The hanging man candlestick on the daily scale

The candlestick at A is a hanging man. Price opens near the high, drops much lower, and then claws its way back toward the high. In this case, the hanging man is a white bodied candle, but candle color is unimportant. The hanging man appears in an upward price trend, as required, only price breaks out downward in this example. Price tumbles. This hanging man performs as a reversal of the existing uptrend.

A downward breakout is not unusual since an upward breakout only occurs 59% of the time. I consider that almost random. With price closing so near the top of the candle, an upward breakout (a close above the top of the candle) should be expected anyway.

-- Thomas Bulkowski