A Hanging Man chart pattern is a Japanese Candlestick trend reversal pattern. Please visit our videos section on Technical Analysis for Japanese candlestick details.
A Hanging Man chart formation signals the reversal of a bullish phase and start of a bearish phase. For this to happen, there must be an earlier upward trend, shouldn’t there! A Hanging Man candlestick is one where the lower shadow is at least two times longer than the body of the candlestick. The upper shadow is very small. A Hanging Man chart pattern is color neutral i.e., it does not matter whether the closing was higher or lower than the opening, but the trend reversal is supported if it is a red or black candlestick. Confirmation of the start of the bear phase and reversal of the earlier bullish phase is given by the colour of the next candle which is red or black. Traders exit long trades or enter into short trades after this confirmation candle.
After the formation of the Hanging Man, prices should not close above the high of the Hanging Man formation.
Chart is courtesy of Stockcharts.com and also appears here.
Similarly, a hammer signifies the reversal of a bear phase and beginning of a bull phase. Hammers mark support levels or bottoms.
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