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The Hanging Man is a single-candlestick pattern in technical analysis that is used to signal a potential bearish trend reversal.

Here is a breakdown of when and why it is used:

When is a Hanging Man Candlestick Used?
The Hanging Man pattern is used when it appears at the end of an established uptrend (or at the peak of a price rally).

Its appearance signals a warning that the prevailing upward trend may be losing momentum and that a reversal to a downtrend is possible.

Key visual characteristics of the Hanging Man:

Small Real Body: The distance between the open and close price is small.

Near the Top: The real body is located near the top of the trading range.

Long Lower Shadow: The lower wick (shadow) is typically at least twice the length of the real body.

Little to No Upper Shadow: There is little to no wick above the real body.

Color Does Not Matter as Much: The body can be either green/white (close above open) or red/black (close below open), though a red/black body is often considered a slightly stronger signal.

Why is a Hanging Man Candlestick Used?
The pattern's structure and its context (at the top of an uptrend) tell a story about the market psychology and a potential shift in power from buyers to sellers:

Indication of Selling Pressure: The long lower shadow is the most important part. It indicates that sellers were able to push the price down significantly during the trading session. This is a major concern for an uptrend, as it shows that selling interest is re-emerging at high price levels.

Weakening Buyer Strength: Although the price managed to recover and close near the opening price (forming the small body), the initial, deep sell-off suggests that the relentless buying strength that defined the uptrend is faltering. Buyers had to fight hard to prevent a major closing decline.

Bearish Reversal Warning: Traders use the Hanging Man as a warning sign that the buying momentum is becoming exhausted and that the market may be nearing a top. This prompts them to prepare to take profits on long positions or consider initiating short (sell) positions.


Crucial Note for Trading:

Due to the risk of false signals, the Hanging Man is rarely used in isolation. Traders typically wait for confirmation on the following candlestick, which should ideally be a strong bearish candle (closing below the low of the Hanging Man) before taking a short-sell trade.