This one has been bugging me for a long time:
I am trying to figure out why a "Hanging Man" is a reversal /
weakness signal in an up trend.
With the same candle in a down trend, in this case renamed
a "Hammer" I understand the reasoning. There is a spike twice the
size of the body, which shows that the market rejected lower prices
and closed near the open. This supported by other evidence is a
good reversal signal.
However in an uptrend, why would a "Hanging Man" with a spike below,
be considered a reversal / weakness signal. My assumption is that
the spike below, shows that the marrket rejected those prices below ?
For more juice I am quoting Steve Nison:
In a prior issue I addressed a specific type of candle line that has
a very long lower shadow called a hammer. So called because the
Japanese will say the market is trying to hammer out a base. The
criteria for the hammer are:
1. The real body is at the upper end of the trading range.
2. The color of the real body can be black or white.
3. A bullish long lower shadow that is at least twice the height of
the real body.
4. It should have no, or a very short, upper shadow.
The hammer reflects the visual insights obtained from a candle chart—
specifically the hammer's extended lower shadow shows that the
market rejected lower price levels to close at, or near, the highs
of the session.
If the hammer shape line emerges after a rally it is a potential top
reversal signal ominously called a hanging man (see exhibit below).
The name hanging man is derived from the fact that it looks like a
hanging man with dangling legs.
At my seminars I usually don't spend much time on the hanging man
except to sound a note of caution about being too negative at that
signal. The reason for this has to do with the shape of the hanging
man line. To wit, because the hanging man has a long lower shadow I
view that as a plus (since it shows the market bounced back from the
lows of the session). As such, it is especially important that one
wait for bearish confirmation with the hanging man. At a minimum,
this would be an open under the real body of the hanging man. Even
better would be a close below the hanging man's real body.
The reason for waiting for a close under the hanging man's real body
is that if the market closes lower the next day, those who bought on
the open or close of the hanging man day (and the hanging man should
be at a new high for the most recent move) are now left "hanging"
with a losing position. In this scenario, the longs entering on the
hanging man session's open or close are in their position at new
highs, thus making them more nervous. Consequently, those longs
might decide to back out of their now losing position. That could
cascade into more selling pressure. As the Japanese proverb
says, "One coward makes 10."
I am trying to figure out why a "Hanging Man" is a reversal /
weakness signal in an up trend.
With the same candle in a down trend, in this case renamed
a "Hammer" I understand the reasoning. There is a spike twice the
size of the body, which shows that the market rejected lower prices
and closed near the open. This supported by other evidence is a
good reversal signal.
However in an uptrend, why would a "Hanging Man" with a spike below,
be considered a reversal / weakness signal. My assumption is that
the spike below, shows that the marrket rejected those prices below ?
For more juice I am quoting Steve Nison:
In a prior issue I addressed a specific type of candle line that has
a very long lower shadow called a hammer. So called because the
Japanese will say the market is trying to hammer out a base. The
criteria for the hammer are:
1. The real body is at the upper end of the trading range.
2. The color of the real body can be black or white.
3. A bullish long lower shadow that is at least twice the height of
the real body.
4. It should have no, or a very short, upper shadow.
The hammer reflects the visual insights obtained from a candle chart—
specifically the hammer's extended lower shadow shows that the
market rejected lower price levels to close at, or near, the highs
of the session.
If the hammer shape line emerges after a rally it is a potential top
reversal signal ominously called a hanging man (see exhibit below).
The name hanging man is derived from the fact that it looks like a
hanging man with dangling legs.
At my seminars I usually don't spend much time on the hanging man
except to sound a note of caution about being too negative at that
signal. The reason for this has to do with the shape of the hanging
man line. To wit, because the hanging man has a long lower shadow I
view that as a plus (since it shows the market bounced back from the
lows of the session). As such, it is especially important that one
wait for bearish confirmation with the hanging man. At a minimum,
this would be an open under the real body of the hanging man. Even
better would be a close below the hanging man's real body.
The reason for waiting for a close under the hanging man's real body
is that if the market closes lower the next day, those who bought on
the open or close of the hanging man day (and the hanging man should
be at a new high for the most recent move) are now left "hanging"
with a losing position. In this scenario, the longs entering on the
hanging man session's open or close are in their position at new
highs, thus making them more nervous. Consequently, those longs
might decide to back out of their now losing position. That could
cascade into more selling pressure. As the Japanese proverb
says, "One coward makes 10."
