Technical analysis Chart analysis

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

Elena Berseneva 04 march 2022 169 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
To conclusion

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

К выводам


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:

XLSX (0.10 MB)Application to the article 'The pattern 'Hanged man - a reversal pattern. Is this the case in practice'.xlsx

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