| If You Learn Technical Analysis, You Need To Learn About The Hanging Man Pattern |
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| Written by Chris Blanchet |
| Thursday, 16 July 2009 14:07 |
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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.
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. This installment of the Learn Technical Analysis Series examines a short-term pattern called the Hanging Man. With an eye on the short-term outlook of a security, this pattern indicates when it is time to sell an existing position or sell short a non-existent one. In other words, it is 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. As noted in previous parts of this series, any technical pattern or indicator, including the Hanging Man, should never be used in isolation. Investors who properly learn technical analysis should always confirm the signals they discover. On the open of the day following the Hanging Man pattern, investors should seek a gap down from the Real Body of the pattern. The wider the gap (the farther down it opens from the Real Body) the better. Additional confirmation can be obtained if the Real Body of the day that follows the pattern is entirely below the Real Body of the Hanging Man pattern. Since most traders who learn technical analysis will not wait two days to execute a trade based on a Hanging Man, other technical and fundamental indicators should be used to confirm or refute the pattern early. Some things investors should be cautious about is overall bullish market activity. Overly bullish markets often product false Hanging Man patterns, which can be confirmed when the open following the pattern is higher than the Real Body. Also, investors should not overlook the "color" of the Hanging Man's Real Body. Remember that "green and White are a Bear Trap's Delight" when it comes to the Hanging Man. Even after people learn technical analysis, they will never rely on a single pattern to make a decision on a security. In most cases, they will use the pattern as a starting point and refer to other patterns and indicators to confirm or refute that indication. The more confirmation they have, the smarter their trades and consequently the higher their success. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Chris Blanchet has more than 16 years of experience as a Financial Advisor at one of the world's largest banks by market capitalization. To learn technical analysis free visit Online Trader Today.com where Chris writes about Technical Analysis and Options trading. Chris also maintains a debt-free blog at How To Repay Debt.com |