The trading market can be as exciting as it can be rewarding. But to accrue the rewards you need to put in work. You should learn to read analytical charts, patterns and trends. Seasoned investors often refer to a hugely popular method of analytics known as the candlestick patterns to predict the movement of their assets. One such pattern is known as the paper umbrella candlestick pattern. Let’s find out what it is.
What is paper umbrella candlestick – definition and features?
A common pattern characterised by a single candlestick, the paper umbrella candle pattern is an analytical tool used by traders to set up directional trades. Traders interpret the paper umbrella based on its appearance on a trading chart, which may change quite frequently. This pattern further comprises of two trend reversal patterns – the hanging man and the hammer pattern of which the former is a bearish pattern while the latter is bullish.
You can recognise the paper umbrella candlestick on analytical charts by its long lower shadow and a small upper body. A candle is deemed a paper umbrella candle if the length of the shadow is at least, twice the length of the candle’s actual body. This structure is known as the shadow to real body ratio.
The Hammer formation in the paper umbrella candlestick pattern
Occurring at the bottom of a trend, the bullish hammer is one of the most significant candle patterns. The bullish hammer comprises of a small real body and a long lower shadow, and it appears at the upper end of a trading range. The pattern is deemed increasingly bullish based on the length of the lower shadow. The colour of the hammer does not exactly matter. However, traders believe that the appearance of a blue-coloured real body is more comforting.
Breaking down the Hammer formation
In an ongoing downtrend, the market tends to keep falling and making new lows. When the hammer pattern is formed, the market starts moving lower as expected, making a new low. But, at the low point, a little buying interest emerges, which pushes the prices higher to such an extent that the price of the asset traded closes near the day’s high point. This implies the bulls were reasonably successful in restricting the prices from falling further. Through this action, the market sentiment for the stock could potentially change, making traders interested in buying it.
Understanding the Hanging Man formation in the paper umbrella candlestick pattern
The appearance of the paper umbrella at the top end of an uptrend rally is known as the ‘Hanging Man’. The Hanging Man indicates the bearish reversal of an ongoing trend. It typically signals a market high of the asset traded. A crucial thing to remember about the hanging man is that its prior trend should be an uptrend.
Breaking down the Hanging Man formation
The Hanging Man formation is the exact opposite of the hammer formation. In an uptrend, the market continues to make new highs. When the hanging man pattern is formed, from the opening price, traders witness a relative selling interest, which pushes the prices lower. While the bulls try to push the prices higher, they are often successful in closing near the opening price, leading to the formation of a long lower shadow. This implies the failure of the bulls. As such, the hanging man builds a case for stock shorting.
To gain success as a trader, you should know about the various analytical tools and chart patterns, including the paper umbrella candlestick. To know more, reach out to an Angel One Expert.