7.1 – The Study of Paper Umbrella

A paper umbrella is a single pattern of candlesticks that traders can use to set up directional trades. The position of the paper umbrella on the chart will affect the interpretation.
Two trend reversal patterns are found in a paper umbrella: the hanging man pattern and the hammer pattern. The hanging man pattern is bullish while the hammer is more bullish. The paper umbrella has a long shadow and a small body.

The paper umbrella that appears at the bottom of a down rally is known as the"Hammer".

The paper umbrella that appears at the top of an uptrend rally is known as the"Hanging Man".

A candle can be classified as a paper umbrella if its lower shadow is at least twice as long as the actual body.This is named as The ratio of shadow to real body OR The Shadow to real body ratio.

Let's take an example: Open = 100; High = 103; Low = 94; Close = 102 (bullish candle).

This is the length of your real body.Close - Open, i.e. 102-100 = 2The length of the lower shadow.Open - Low, i.e. 100 - 94% = 6. The length of the shadow below is twice that of the actual body, so we can conclude there has been a formation.

7.2 - The Formation of Hammer

Bullish hammer is a prominent candlestick pattern that occurs near the bottom of the trend. A hammer is a small, real body that sits at the top of the trading range and has a long shadow. Bullish patterns are more bullish if they have a longer shadow.
 

The blue hammer's upper shadow is very small.This can be accepted for given the" quantity and verify -be flexible" rule

As long as the hammer meets the'shadow to real body' ratio, it can be any colour. It is more comfortable to see a blue-colored real body.

The previous trend for the hammer should have been a downtrend. The curved line highlights the previous trend. This is the thought process behind a Hammer:

1. The market is currently in a downtrend and the bears have complete control.
2. In a downtrend, the market opens lower than the previous day's closing and closes lower again to make a new low.
3. The market trades lower on the day that the hammer pattern is formed, and then makes a new low
4. However, prices rise when buying interest is present at the lowest point. Stocks close near the high points of the day.
5. On the hammer formation the price action simplifies that from falling further the Bulls tried to break the price,and got succeeded.
6. The bulls' actions have the potential to change stock sentiment. You should therefore look for buying opportunities.

This is the trade setup for hammers:

1. A hammer formation indicates a long trade.
2. Trader's entry time will depend on their risk appetite. The trader who is willing to take on risk can purchase the stock that day. The actual colour of the hammer is irrelevant. Rule 1 does not apply. If the trader is cautious and is not willing to take on risk, he may buy the stock one day after the pattern forms. However, this must be done after ensuring that there is no blue candle day.
   1. If you are willing to take a chance, qualify the day for Hammer Day by following the condition at 3:20 pm on the Hammer Day...
      1. Close and open should be nearly equal (within a 1-2% range).
      2. The shadow should not be shorter than the actual body.
      3. If these conditions are met then the pattern can be a hammer and the risk-taker may take a long view.
   2. Risk-averse traders should carefully evaluate the OHLC data for the 2 and. If the trade is a blue candle, he can take it long.
3. The stoploss in a trade is the low of the hammer. This would be the trade setup:

   Buy Price to take risk - He trades on Hammer candle at - Rs.444/.

   If you are a risk-averse, buy price - After evaluating the candle's blueness at - Rs., he takes the trade. 445.4/-

   Both traders have a stoploss at Rs.441.5 /-,,, which is the low point of the hammer formation.

   Notice how the trade evolved and yielded a desirable intraday profit.
    

   Both hammers were qualified on the preconditions for a hammer (i.e. These are the hammers:

   1. The previous trend was a downtrend
   2. Ratio shadow to real body

   Thanks to Rule 1 of candlesticks, the risk-averse trader could have avoided a loss-making trade with the first hammer. The second hammer would have attracted both risk-averse traders and risk-takers to trade. The stock didn't move up after initiating the trade; it remained almost flat and eventually cracked down.

   You must keep the trade open until the target or stop loss is reached. It is best to not alter the trade after one of these events has occurred. This trade is a sure-fire way to lose. This is a calculated and real risk, not a speculative one.

   Another chart shows a perfect hammer; however, it doesn't satisfy the previous trend condition and is hence not is not a pattern.

   7.3. A brief about "The Hanging Man"

   A Hanging Man is a paper umbrella that appears at the top of a trend. A bearish hanging man is one candlestick. It also signals a top reverse pattern. A hanging man is a sign of a high market. A hanging man is classified as an indicator of a high market.Only if there is an uptrend before it. The bearish hanging man pattern indicates that you should sell pressure since the hanging man is usually seen following a high.

   Any colour is acceptable for a hanging man, as long as it meets the ratio of 'the shadow and real body'. The Hanging Man's previous trend should be an uptrend shown by the curve in the chart, it is. This is the thought process behind a hanging person:

4. The market is currently in an uptrend. Therefore, the bulls have absolute control.
5. The market is characterized by new highs and higher lows.
6. The bears made it into the world by displaying the hanging man pattern.
7. This is highlighted by the long shadow at the bottom of the hanging man.
8. Bears entering signifies they are trying to destroy the bulls' hold.

9. The hanging man is a strong argument for shorting the stock. This is how the trade would look:

10. A short trade can be opened by those who are willing to take a risk. It is possible to start a trade the same day as the closing price.
11. If you are hesitant about taking on risk, you can open a short trade at the close of business the next day.
    1. It is possible to validate the candle using the same method for risk-averse and risk-taker as described in a hammer pattern.

12. After the short is initiated, the candle's highest serves as a stoploss.
     

13. The short trade is initiated by the risk-taker on the day that the pattern appears (at 593).

14. Both the risk types would have made a profit from the trade.

    7.4 - Paper Umbrella Experience-

    Both the hanging man and the hammer are valid candlestick patterns. However, I depend a lot more on the hammer than the hanging man. If there were two trading opportunities on the market, one that was based on the hanging man and one that was based upon the hammer, I would choose to trade with the hammer. Based on my trading experience with both patterns, I believe it is reasonable to do so.

    The only problem with a hanging man? If the bears were truly influential during the day why did the price rise after hitting a low? This, I believe, reaffirms the bull's dominance in the market.

    You should develop your own thesis, based on the observations you make in the markets. This will allow you to calibrate your trades more accurately and enable you to develop structured market thinking.
     

    7.5 - The Brief about "Shooting star"

    Before we move on to more candlestick patterns, the shooting star will be our last candlestick pattern. The shooting star's price action makes it a popular candlestick pattern that you can trade.

    The shooting star is a paper umbrella inverted.

    The shooting star has a shorter shadow than a paper umbrella. It has an extended upper shadow, where the shadow is at least twice as long as the actual body. Although the body's colour doesn't matter, the pattern will be slightly more reliable if it is red. The pattern will be more bearish the longer the upperwick is. A common feature of the paper umbrella and the shooting star is the small body. According to the textbook, the shooting stars should not have a lower silhouette. A small shadow is acceptable, as shown in the chart. The shooting star is a bearish pattern.Therefore, the previous trend should be bullish.

    This is how the thinking process behind the shooting star works:

15. The stock is currently in an uptrend, which means that bulls have complete control. The stock or market tends make new highs and lower lows when bulls are in charge.
16. The market trades higher on the day that the shooting star pattern is formed, making a new high.
17. The selling pressure at the high end of the day is where the stock price drops to close near the low points of the day. This creates a shooting star.
18. The selling suggests that bears are entering the market and were successful in driving down prices. The long shadow at the top is a sign of this.
19. It is expected that bears will continue to sell over the next few trading session. Therefore, traders should seek shorting opportunities.
20. The trade-in 1417 will be initiated by the risk-taker, usually on the same day that the shooting star appears.
    1. After ensuring that the day is a shooting star, the risk-taker initiates the trade on the same day. The trader must validate this by:
       1. If the current market price of the low price is greater or less than the current market price
       2. The length of an upper shadow is approximately twice that of the actual body.
    2. Risk-averse traders will only initiate trades the next day after they have verified that there is a 2nd day red candle.
21. After the trade is initiated, the stoploss must be set at the pattern's highest. The stop loss, in this case, is at 1453

22. We have already discussed that once a trade is set up, it is important to wait for the stoploss or target to be activated. It is best to not do anything other than trailing your stop loss. We have not yet discussed trailing stoploss. Later we will discuss it.

     

    Here's a chart showing how both the risk-averse as well as the risk-taker could make a huge profit on trades based upon a shooting star. The stop loss has been violated. Remember that the trader must exit the trade if the stop loss is reached. The trade will no longer be valid. Exiting the trade when the stop loss triggers is often the best option.
     

    Key points

23. A paper umbrella has a large real body and a long shadow. The shadow should be equal in length to the real body. The paper umbrella's lower shadow should not exceed twice the length of the actual body.
24. The paper umbrella's color should not be a factor, as they open and close prices are very close.
25. The 'hammer' is a paper umbrella that appears at the bottom end of a downtrend.
26. The hanging man is the paper umbrella that appears at the top of an uptrend.
27. Bullish patterns include the hammer, so it is worth looking for buying opportunities whenever it appears.
    1. Stop-loss price trades are initiated when the low of the hammer is reached.
28. The bearish pattern of the hanging man appears at the top of the trend and should be considered for selling opportunities.
    1. The stop-loss price is set by the high of the hanging man.
29. The shooting star, a bearish pattern that appears at the top of the trend, is called the shooting star. When a shooting star appears, one should consider shorting.
    1. Stop loss price will be determined by the high of the shooting stars.
30.  
31. After ensuring that it is a red candle, the risk-averse initiates the short trading on the following day at closing prices.
32. Both the risk-taker as well as the risk-averse would have initiated the trades.
33. This trade's stoploss price would be the highest price, i.e. Above 593.75