For full-time investors who rely on volatility and day-to-day fluctuations in security prices, it is an understatement that they must learn technical analysis. Such analysis enables them to make appropriate changes to their positions, but not all technical analysis accommodates short-term trading. For traders who look to take advantage of quick entry and exit points, short-term patterns are their best allies.

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 pattern 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."

The Hanging Man will consist of a small "Black Body" formed by a higher open and a lower close, as well as a long "Lower Shadow" meaning the stock traded much lower than the close at some point in the day. Ideally, the Lower Shadow will be at least twice as long as the Body. If you are just starting to learn technical analysis, the Hanging Man might look like a square tadpole with a straight tail. See image below for a visual representation:

As with any pattern, people who learn technical analysis will still want to confirm signals with other indicators, including fundamental analysis.

With the Hanging Man, investors will likely want to see a bearish gap between the Real Body of the Hanging Man on the open of the next session. The wider this gap, the better. With this in mind, the Real Body of the following day should ideally be lower than the close of the previous day. For this reason, investors really need to know more than a handful of patterns when they learn technical analysis skills.

 

To read the original version of this article, The Hanging Man is a Great Starting Point to Learning Technical Analysis, click here.