How to Make Money Trading with Candlestick Charts

A Hammer confirming
previous support in ABB

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Hanging Man
Description
Figure 4.7
shows a visual depiction of the
Hanging Man signal. No, I have not copied
the image from 
Figure 4.1
showing the
Hammer. Please notice the difference in the
two images. The formation of the signal is
exactly the same, but the position of the
signal in the trend has changed. 
The
Hammer comes after a downtrend and the
Hanging Man comes after an up trend.

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Figure 4.7:
Hanging Man signal

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Criteria
The conditions for the Hanging Man signal to
be valid are:
The stock must have been in a definite up
trend before this signal occurs. This can
be visually verified on the chart.
The lower shadow must be at least twice
the size of the body.
The day after the Hanging Man signal
should witness continued selling and a
lower close.
There should be no upper shadow or a
very small upper shadow.

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Why the Reversal Works
Consider a stock in an up trend. Investors
and traders are happy that their portfolios are
showing green. Then, one day, big money
decides to take profits. They start selling the
stock. Novice traders, who have seen the
stock rise for the past numerous sessions, see
this dip as a buying opportunity. They start
absorbing the supply and are finally able to
take the price up towards the top of the day’s
trading range. However, the bulls are now
getting nervous. Their confidence in the stock
is dropping. Their greed is turning into fear
— fear of losing their hard earned profits. If
the stock closes lower the next day
confirming their fears, the downtrend will
accelerate from that point on. The bears will

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take control.
The following conditions make the reversal
of the up trend more convincing:
There is a spike in volume on the day of
the signal.
There is a gap up from the previous close
on the day of the signal showing
exuberant buying at the top.
Stochastics are in overbought condition.
The longer the lower shadow, the better.
The colour of the Hanging Man body
does not matter, but a black body would
be a stronger confirmation.
Figure 4.8
shows the chart of Satyam

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Computer Services Ltd. This is an ideal
Hanging Man signal. All the stars have
aligned for the trader to take on the short side
of the trade. Those who are averse to
shorting stocks can at least sell their existing
position and lock-in profits.
Figure 4.8: