Short-term investors rely on volatility and overall stock trends when it comes to making money. It goes without saying that people who want to trade full time will have to learn technical analysis. Armed with this knowledge, traders will be able to execute proper trades and manipulate their positions in such a way to take advantage of short-term profit opportunities. In this regard, short-term patterns become one of the trader’s most heavily used tools.

This installment of the Learn Technical Analysis Series examines a short-term pattern called the Hanging Man. With an eye on the short-term outlook of a security, this pattern indicates when it is time to sell an existing position or sell short a non-existent one. In other words, it is a bearish signal.

When trying to identify a Hanging Man pattern, investors need to pull up the candlestick chart for the security in question. Rookie investors who have just begun to learn technical analysis will identify this type of chart type by a day’s “Real Body” which is a box made up of one horizontal line for the security’s open and another horizontal line for the close, and two vertical lines that join them (or box them in). The “Shadow” is the range in which the security trades over and below the Real Body.

For identifying the Hanging Man, traders who are just starting to learn technical analysis want the Real Body to be black, something that is created by a lower close. As well, the Shadow will preferably exist only below the Real Body. In fact, the Shadow, which will look more like a tail to a square body, should be at least twice as long as the Real Body.

As noted in previous parts of this series, any technical pattern or indicator, including the Hanging Man, should never be used in isolation. Investors who properly learn technical analysis should always confirm the signals they discover.

On the open of the day following the Hanging Man pattern, investors should seek a gap down from the Real Body of the pattern. The wider the gap (the farther down it opens from the Real Body) the better. Additional confirmation can be obtained if the Real Body of the day that follows the pattern is entirely below the Real Body of the Hanging Man pattern. Since most traders who learn technical analysis will not wait two days to execute a trade based on a Hanging Man, other technical and fundamental indicators should be used to confirm or refute the pattern early.

When the overall market sentiment is overly bullish, Hanging Man patterns are often falsely created. For this reasons, investors should sit tight until the following day. If the open is higher than the Real Body of the Hanging Man, it is likely a false signal. Also, investors should never forget to take the Hanging Man’s Real Body’s color into account — “green and white are a bear trap’s delight!” Remember that a red or black Real Body creates a more reliable pattern.

Without question, people who learn technical analysis can use their skills as primary discovery tools for buying and selling opportunities, or as confirmation for trades. Ultimately, they will make smarter trades and enjoy the rewards.