«A hanging Man»: A Reversal Pattern. Is It the Case in Practice?

04 March 2022 850 4

Steve Nison in his book “Japanese Candlesticks” suggests identifying “a hanging man” with three main charactreristics:

1. The body is in the upper part of the price range. The body’s color is not significant.
2. The lower shadow two times longer the body.
3. The candlestick has not the upper shadow or it is very short.

The longer the lower shadow is and the smaller the body is, the greater the potential of the “hanging man”.

For the «inverted hammer», the situation is mirrored.

Hypothesis

«A hanging man» and «the inverted hammer» are reversal models of the market.

﻿﻿﻿﻿﻿﻿﻿Method of event’s measurement

 Sell signal High[1] > High[2] (the uptrend)High[2] > High[3] (the uptrend)(High[1] - Min(Open[1],Close[1])) / (High[1] - Low[1]) <= Т (%) Buy signal Low[1] < Low[2] (the downtrend)Low[2] < Low[3] (the downtrend)(Max(Open[1],Close[1]) – Low[1]) / (High[1] - Low[1]) <= Т (%)

We will carry out the test against «a hanging man» and «an inverted hammer» in their three combinations regulating the notional parameter the “body” of a candlestick. Let us call it as Т and describe it as a candlestick body plus a small tail which may or may not be included.

So, we will consider the following combinations:

In the picture, the “hanging man” pattern with different body lengths is shown. The situation is identical for “the inverted hammer”.

Let us discuss conditions of the opening and closing a trading position.

Opening a position:

When the pattern is materialized, a position opens at the opening of a new candlestick:

• A hanging hammer: a sell signal;
• An inverted hammer: a buy signal.

Closing a position:

The lifetime of the position is set at 5, 10, or 15 in all cases.

Data used

Let us specify the list of financial instruments and their timeframes against which we will carry out the test of a trading signal:

• 25 currency pairs (Forex);
• 6 commodity futures (Commodities);
• 2 US stock indices (US indices);
• 30 US stocks (US stocks);
• 57 RF stocks (RF stocks);
• 1 RF stock index (RF index).

Timeframes used:

• H1 (1 hour): the history for the period of 5 years,
• D1 (1 day): the history for the period of 10 years.

The total is 1 980 817 values.

Having specified all the conditions and set the necessary parameters, we can start testing!

Analysis of the results

First, we will estimate the results based on the sample size.

Т <= 10%

For the 1-hour timeframe (H1):

 Market segment Number of candlesticks Number of events Forex 655727 117 Commodities 115947 134 US indices 52779 12 RF index 11419 1 US stocks 234496 94 RF stocks 613039 592 Total 1683407 950

For the 1-day timeframe (D1):

 Market segment Number of candlesticks Number of events Forex 67473 21 Commodities 15451 4 US indices 5451 1 RF index 2517 1 US stocks 71607 42 RF stocks 134911 186 Total 297410 255

Т <= 20%

For the 1-hour timeframe (H1):

 Market segment Number of candlesticks Number of events Forex 655727 1199 Commodities 115947 281 US indices 52779 91 RF index 11419 26 US stocks 234496 646 RF stocks 613039 2069 Total 1683407 4312

For the 1-day timeframe (D1):

 Market segment Number of candlesticks Number of events Forex 67473 118 Commodities 15451 22 US indices 5451 12 RF index 2517 7 US stocks 71607 238 RF stocks 134911 566 Total 297410 963

Т <= 40%

For the 1-hour timeframe (H1):

 Market segment Number of candlesticks Number of events Forex 655727 14258 Commodities 115947 1965 US indices 52779 1014 RF index 11419 252 US stocks 234496 5300 RF stocks 613039 11734 Total 1683407 34523

For the 1-day timeframe (D1):

 Market segment Number of candlesticks Number of events Forex 67473 1382 Commodities 15451 289 US indices 5451 153 RF index 2517 59 US stocks 71607 1849 RF stocks 134911 3329 Total 297410 7061

The total number of candlesticks and events:

 Event Number of candlesticks Number of events Т <= 10% 1 980 817 1205 Т <= 20% 1 980 817 5275 Т <= 40% 1 980 817 41584

Then, we will measure the share of events in % in the total number of initial candlesticks on the basis of timeframes:

For the 1-hour timeframe (H1):

 Event Forex Commodities US indices RF index US stocks RF stocks T <= 10% 0.02 0.12 0.02 0.01 0.04 0.10 T <= 20% 0.18 0.24 0.17 0.23 0.28 0.34 T <= 40% 2.17 1.69 1.92 2.21 2.26 1.91

For the 1-day timeframe (D1):

 Event Forex Commodities US indices RF index US stocks RF stocks T <= 10% 0.03 0.03 0.02 0.04 0.06 0.14 T <= 20% 0.17 0.14 0.22 0.28 0.33 0.42 T <= 40% 2.05 1.87 2.81 2.34 2.58 2.47

Let us note that the more explicit the patterns are, the less their share, and the less they likely appear on charts.

Now, we will view the results of the performance of signals of the «hanging hammer» and the «inverted hammer» patterns.

We will assess the results with the two following criteria:

• Momentum (m) reflects the average change in quotes of financial instruments at the moment of closing a position, in %. A positive value of the momentum indicates profitability of the signal performance, a negative value indicates loss-making.
• SPP, the share of profitable positions, %.

Let us consider the results on a term-to-term basis of the hold of positions, timeframes, indicators, and market segments.

We take the following notations:

«H1 / 5», closing a position at the 5th candlestick over the 1-hour timeframe;

«H1 / 10», closing a position at the 10th candlestick over the 1-hour timeframe;

«H1 / 15», closing a position at the 15th candlestick over the 1-hour timeframe;

«D1 / 5», closing a position at the 5th candlestick over the 1-day timeframe;

«D1 / 10», closing a position at the 10th candlestick over the 1-day timeframe;

«D1 / 15», closing a position at the 15th candlestick over the 1-day timeframe;

«Т», the length of the candlestick body, %;

Volatility coefficient:

• For the daily timeframe: a ratio between the average volatility of 5 candlesticks after the opening of a position and the average volatility of 20 candlesticks preceding the opening a position.
• For the 1-hour timeframe: a ratio between the average volatility of 5 candlesticks after the opening a position and the average volatility of the same hours during the previous 4 days.

If the value of volatility coefficient is more than 1, it indicates a greater volatility after the signal in comparison with volatility before the signal, if the value is less than 1, it is the opposite.

Т <= 10%

The Number of signals, the Momentum in %, the Share of profitable positions, Volatility coefficient on a term-to-term basis of the hold of positions, timeframes, and market segments

 Т<=10% Indicator Forex Commodities US indices RF index US stocks RF stocks All Н1/5 Number of signals 117 134 12 1 94 592 950 Momentum 0.040 0.051 -0.092 -0.862 -0.218 -0.022 -0.062 SPP 66.2 45.8 27.8 0.0 42.3 47.6 49.3 Volatility coefficient 0.98 1.06 1.01 0.95 1.06 1.04 1.03 Н1/10 Number of signals 117 134 12 1 94 591 949 Momentum 0.015 0.276 -0.057 -0.851 -0.131 -0.076 -0.059 SPP 51.5 52.5 27.8 0.0 50.8 51.9 50.7 Volatility coefficient 0.98 1.06 1.01 0.95 1.06 1.04 1.03 Н /15 Number of signals 117 134 12 1 94 591 949 Momentum -0.008 0.056 -0.019 -0.330 -0.032 -0.176 -0.093 SPP 51.0 40.4 44.4 0.0 50.1 47.7 48.2 Volatility coefficient 0.98 1.06 1.01 0.95 1.06 1.04 1.03

 Т<=10% Indicator Forex Commodities US indices RF index US stocks RF stocks All D1/5 Number of signals 21 4 1 1 42 186 255 Momentum 0.076 1.794 -0.310 1.536 0.269 -0.353 -0.033 SPP 50.4 66.7 0.0 100.0 46.4 51.5 50.5 Volatility coefficient 1.06 0.91 0.55 0.85 1.02 1.01 1.01 D1/10 Number of signals 21 4 1 1 42 186 255 Momentum 0.093 4.409 -0.270 3.413 0.488 -0.708 -0.050 SPP 53.8 66.7 0.0 100.0 46.7 47.4 48.7 Volatility coefficient 1.06 0.91 0.55 0.85 1.02 1.01 1.01 D1/15 Number of signals 21 4 1 1 42 186 255 Momentum 0.529 3.637 -1.552 6.586 -0.210 -0.579 -0.130 SPP 68.1 66.7 0.0 100.0 39.6 45.1 47.0 Volatility coefficient 1.06 0.91 0.55 0.85 1.02 1.01 1.01

﻿﻿﻿﻿﻿T <= 20%

The Number of signals, the Momentum in %, the Share of profitable positions, Volatility coefficient on a term-to-term basis of the hold of positions, timeframes, and market segments

 T<=20% Indicator Forex Commodities US indices RF index US stocks RF stocks All Н1/5 Number of signals 1199 281 91 26 646 2069 4312 Momentum 0.009 0.006 0.133 -0.052 -0.011 -0.077 -0.035 SPP 55.0 48.0 54.7 42,3 47.4 47.2 49.0 Volatility coefficient 1.01 1.03 1.17 0,98 1.03 1.04 1.03 Н1/10 Number of signals 1199 281 91 26 646 2067 4310 Momentum 0.010 0.096 0.192 -0,234 -0.020 -0.141 -0.064 SPP 53.2 49.1 52.7 46,2 51.5 47.9 50.0 Volatility coefficient 1.01 1.03 1.17 0,98 1.03 1.03 1.03 Н1/15 Number of signals 1199 281 91 26 645 2066 4308 Momentum -0.002 0.102 0.190 -0,176 0.020 -0.198 -0.083 SPP 51.3 47.6 57.2 42,3 51.1 48.1 49.6 Volatility coefficient 1.01 1.03 1.17 0,98 1.03 1.03 1.03

 T<=20% Indicator Forex Commodities US indices RF index US stocks RF stocks All D1/5 Number of signals 118 22 12 7 238 566 963 Momentum -0.066 0.622 0.414 0.534 0.187 -0.568 -0.194 SPP 52.4 51.4 65.0 42.9 48.1 47.6 49.1 Volatility coefficient 1.00 0.97 0.89 1.04 1.04 1.00 1.01 D1/10 Number of signals 117 22 12 7 238 564 960 Momentum -0.053 1.395 0.434 0.932 0.360 -0.123 0.106 SPP 54.6 59.7 35.0 57.1 47.5 51.6 51.4 Volatility coefficient 1.00 0.97 0.89 1.04 1.04 1.00 1.01 D1/15 Number of signals 117 22 12 7 237 564 959 Momentum 0.070 1.811 -0.238 1.143 0.040 0.084 0.160 SPP 55.6 41.7 35.0 57.1 46.9 52.6 51.0 Volatility coefficient 1.00 0.97 0.89 1.04 1.04 1.00 1.01

T <= 40%

The Number of signals, the Momentum in %, the Share of profitable positions, Volatility coefficient on a term-to-term basis of the hold of positions, timeframes, and market segments

 T<=40% Indicator Forex Commodities US indices RF index US stocks RF stocks All Н1/5 Number of signals 14258 1965 1014 252 5300 11734 34523 Momentum 0.005 0.018 0.000 -0.024 0.016 -0.013 0.000 SPP 52.0 49.1 49.2 46.8 50.3 49.5 50.2 Volatility coefficient 0.99 1.01 1.00 0.99 1.00 1.03 1.01 Н1/10 Number of signals 14256 1965 1014 251 5297 11726 34509 Momentum -0.001 0.063 -0.023 -0.046 0.008 -0.053 -0.021 SPP 51.7 50.6 48.6 46.6 50.8 49.2 50.2 Volatility coefficient 0.99 1.01 1.00 0.98 1.00 1.02 1.01 Н1/15 Number of signals 14255 1965 1014 251 5294 11720 34499 Momentum -0.004 0.073 -0.049 -0.025 0.004 -0.107 -0.048 SPP 50.6 51.0 48.0 47.4 50.5 50.0 50.2 Volatility coefficient 0.99 1.01 1.00 0.98 1.00 1.02 1.01

 T<=40% Indicator Forex Commodities US indices RF index US stocks RF stocks All D1/5 Number of signals 1382 289 153 59 1849 3329 7061 Momentum 0.010 0.031 0.418 -0.068 0.137 -0.247 -0.074 SPP 50.4 49.5 49.7 39.0 51.0 49.1 49.8 Volatility coefficient 1.00 1.02 1.00 0.93 1.02 1.01 1.01 D1/10 Number of signals 1374 288 153 59 1844 3318 7036 Momentum -0.001 0.305 0.212 -0.019 0.246 -0.161 0.002 SPP 49.8 52.0 47.4 50.9 51.5 49.7 50.2 Volatility coefficient 1.00 1.02 1.00 0.93 1.02 1.01 1.01 D1/15 Number of signals 1372 287 153 59 1839 3314 7024 Momentum -0.030 0.399 0.108 -0.158 0.225 -0.103 0.021 SPP 50.3 50.4 42.5 45.8 51.7 50.3 50.5 Volatility coefficient 1.00 1.01 1.00 0.93 1.02 1.01 1.01

Let us summarize the obtained results using the following diagrams:

Conclusion

Momentums

The highest momentum of 0.160% is shown by signals over the daily timeframe with the closing a position at the 15th candlestick.

The lowest momentum of -0.194% is shown by signals over the daily timeframe with the closing a position at the 5th candlestick.

In general, momentums of signals of the «hanging» and the «inverted hammer» patterns do not reach the minimum value of 0.3% with the module for the daily timeframe and 0.15% with the module for the 1-hour timeframe.

SPP

The share of profitable positions of signals of the 1-hour timeframe vary between 48.2% and 50.7%, signals of the daily timeframe vary between 47.0% and 51.4%.

Volatility

Volatility does not change after signals (changes at most 5%) at both timeframes with any body of a candlestick.

The use of the «hanging» и the «inverted hammer» patterns in the market forecasting has not been identified.

Detailed results are shown in the Appendix:

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