The Hanging Man: A Powerful Reversal Signal in Forex Trading

HANGING MAN PATTERNS

The hanging man pattern may mark a reversal of a stock’s uptrend. Hanging man patterns look just like hammers except that they occur after a stock has been in an uptrend. Hanging man patterns have long lower shadows or tails, short or no upper shadows, and small bodies. The color of the body is not important. The lower tail should be twice the length of the body or more. There should be no or very little upper shadow, indicating the day’s high should be near the close for a white body and near the open for a black body.

Since the hanging man may occur at the end of an uptrend, traders attempt to profit from the pattern by entering short positions and then covering the position after a few days. In a short sale, the trader borrows stock from the broker and sells it, then buys it back on the open market to close out the position and return the borrowed stock.

Figure 5.1 shows a hanging man pattern that occurred in CME on 11/27/06. CME had broken out of a base and started moving up. On Nov. 27, CME formed a hanging man as marked by the down arrow. The hanging man pattern marked the end of the uptrend, as during the next five trading sessions CME dropped about 18 points. 

FIGURE 5.1: HANGING MAN PATTERN IN CME ON 11/27/06

Another example of a hanging man pattern is shown in Figure 5.2. DPHIQ had been in an uptrend until the hanging man formed on 10/27/06 when the day’s trading formed a black body with a small upper shadow and a long lower shadow. This hanging man pattern marked the end of the uptrend and an opportunity for a 20% gain from a short position. 

FIGURE 5.2: HANGING MAN PATTERN IN DPHIQ ON 10/27/06

Of course no trading pattern works all the time and when the hanging man does not mark the end of an uptrend and the stock keeps rising, traders will lose money in a short position. Figure 5.3 shows a hanging man that occurred on 04/26/06 in HSOA. The pattern is the same; the stock had been in an uptrend and then, on April 26, the trading activity formed a long lower shadow with a small upper shadow, yet the stock kept going up over the next five sessions.

FIGURE 5.3: FAILED HANGING MAN PATTERN IN HOSA ON 04/26/06