Get To Know The Hanging Man Pattern When You Learn Technical Analysis
In order to make quick money in the markets, traders need to assess opportunities that are created by volatility and fluctuations in security prices. To do this efficiently, all serious trades will learn technical analysis skills, which give them an indication as to when they should enter and exit a position with the least amount of risk to their capital. For short-term trades, investors will study short-term patterns.
As part of the ongoing Learn Technical Analysis Series, we will discuss a short-term pattern known as the Hanging Man. This pattern gives traders an outlook as to the short-term range of that security. And given its gloomy name, investors can immediately identify the Hanging Man as a bearish signal.
When looking for a Hanging Man, investors will need to study the security’s candlestick chart. For those who have just started to learn technical analysis, the candlestick consists of horizontal lines for the open and close, and a vertical line for the day’s range. The open and close lines are squared off, forming the “Real Body” and if the range traded above the open or below close, that part forms the tail, or “Shadow.”
When it comes to the Real Body of a Hanging Man, it will need to be a “Black Body” meaning the security closed lower than it opened. The Shadow will look like a tail with preferrably no Shadow above the Real Body. The tail should also be rather long, ideally twice as long as the box of the Real Body. For investors who are just starting to learn technical analysis, the Hanging Man might look more like a square tadpole than a hanging man.
Since no pattern should ever be used in isolation, investors who learn technical analysis should confirm the Hanging Man with other indicators and analysis, including the security’s and/or market’s fundamentals.
One way to confirm the signal is on the following trading day, investors should seek a bearish gap on the open from Real Body. The farther down from the Real Body, the better. In terms of the following day’s Real Body, it should be lower than the signal’s Real Body, something that will not be confirmed until the close. For this reason, astute investors who learn technical analysis will rely on a multitude of other indicators when making trades based on a Hanging Man.
When the overall market sentiment is overly bullish, Hanging Man patterns are often falsely created. For this reasons, investors should sit tight until the following day. If the open is higher than the Real Body of the Hanging Man, it is likely a false signal. Also, investors should never forget to take the Hanging Man’s Real Body’s color into account — “green and white are a bear trap’s delight!” Remember that a red or black Real Body creates a more reliable pattern.
When investors learn technical analysis, they often use one pattern (such as the Hanging Man) as a starting point when it comes to discovering opportunities. Rarely will they rely on a single indicator. Using multiple indicators and analysis will result in smarter trades and a greater success ratio.
