A Hanging Man is similar to a hammer, except for the fact that it occurs at the top of a trend in an uptrend. The name comes from the fact that this candle line looks like a man hanging. The body of the candle is concentrated mostly in the upper part of the candle.
How to recognize the Pattern?
- The small real body is at the upper end of the candle.
- Its not important that what is the color of the candle.
- The small real body should be one third of the lower shadow.
- The upper shadow should be very small or absent.
The market was bullish since it was in an uptrend. During the day of the pattern formation, the price action traded much lower than where it opened, then rallies to close near the high. This is the reason for a long lower shadow. Now, when the market opens next day, lower than where it closed the previous day, people who were long in the stock would close their positions initiating a short position. New participants will also enter the rally by creating new short positions.
This makes the stock to close at its low during that day. A conservative trader might wait for another day after the hanging man and initiate a position, because there is a strength in the pattern formation.