From the March 2014 issue of Futures Magazine • Subscribe!

Top 5 candlestick strategies

Hanging man

Hanging man candlestick formations are another reversal pattern. This formation typically happens after a prolonged uptrend when a security moves significantly lower after the open, but rallies to close well above the intraday low. It is important to emphasize that the hanging man pattern is a warning of potential price change, not a signal, in and of itself, to go short.

“Hang ‘em high” (below) includes an example found in Alcoa (AA). On Feb. 15, Alcoa formed a hanging man pattern after a brief uptrend, Alcoa opened at $9.34 and made a high of $9.36, a low of $9.20 and then closed at $9.32. So after making a low of $9.20, Alcoa recovered and closed almost near its opening price.

A trader might have taken short positions once the Feb. 15 low of $9.20 was taken out in subsequent trading sessions. This happened on Feb. 19 when Alcoa opened at $9.31. Once the $9.20 level was broken, shorts might have been initiated, with a stop loss set at the Feb. 15 high of $9.36. In later trading sessions, Alcoa reached a low of $8.30.

Although they are relatively reliable, candle patterns are just one tool in a trader’s toolbox. Traders should integrate candlestick analysis, moving averages, Bollinger bands, price patterns (such as triangles) and indicators (such as stochastic or CCI) to reach trading decisions. Of course, the break of a simple trendline is a powerful message that should not be ignored, particularly when done in the neighborhood of reversal formations. 

Bramesh Bhandari writes at www.bramesh-techanalysis.com and provides online tutoring on technical analysis. He can be reached via email at bhandaribrahmesh@gmail.com.

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