Monday, July 8, 2013

Candlesticks: Hanging Man

The hanging man is one of the 12 major candlestick patterns and it produces very important attributes when analyzing a potential reversal. This signal is comprised of one candle and it is easily identified by the presence of a small body with a shadow at least two times greater than the body. It is found at the top of an up-trend and the probability of making a correct trade  becomes extremely high when utilizing this signal. The Japanese named this pattern the hanging man because it looks like a head with the feet dangling down.
Criteria for hanging man
  • The upper shadow should be at least two times the length of the body.
  • The real body is at the upper end of the trading range. The color of the body is not important although a black or red body should have slightly more bearish implications.
  • There should be no upper shadow or a very small upper shadow.
  • To confirm the hanging man signal a black candle should be seen the following day. An even better confirmation of this signal is to see a gap down with a lower close.
Signal Enhancements
  • The longer the lower shadow the higher the potential of a reversal occurring.
  • A gap up from the previous day’s close sets up for a stronger reversal provided prices trade lower the day after the hanging man signal is formed.
  • Although it is not a necessity a large volume on the signal day increases the chances that a blow-off day has occurred.
Pattern Psychology
After a strong up-trend has been in effect the atmosphere is bullish. The price opens higher but then begins to move lower. The bears take control but before the end of the day the bulls step in and take the price back up to the higher end of the trading range. This creates a small body for the day and could indicate that the bulls still have control. The long lower shadow however represents that sellers have started stepping in at these levels. Even though the bulls may have been able to keep the price positive, by the end of the day the evidence of selling is apparent. A lower open or a black or red candle the following day reinforces the fact that selling continues.

The twelve major candlestick signals demonstrate the visual elements produced by human emotions. You can learn to correctly analyze what these emotions are doing at specific points of a trend. Use Japanese Candlesticks to profit from your investment decisions today!

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