PAPER UMBRELLA 

It is a single candlestick pattern useful in identifying trend reversal signals. For a candle to be termed as Paper umbrella, the length of the lower shadow should be atleast twice the length of the real body and there is no upper shadow as per text book rules. But in the real market scenario if there is negligible formation of upper shadow, it is still considered to be a paper umbrella and it is acceptable because of the rule "Be flexible - quantify and verify" as mentioned in the earlier posts about candlestick patterns. There are two kinds of paper umbrella which is Hammer and Hanging man. If paper umbrella appears at the bottom end of a downward rally, it is called the 'Hammer'. If paper umbrella appears at the top end of a uptrend rally, it is called the 'Hanging man'.

HAMMER

Hammer is the paper umbrella candlestick formed at the bottom end of a downward rally. A hammer consists of a small real body at the upper end with a longer lower shadow. The color of the real body does not matter. 


In the above Infy chart, following observations can be made:

1. The lower shadow of the candle is twice the length of real body so it can be qualified as Hammer. 
2. Hammer is identified at the bottom end of prior downtrend.
3. Price action on the hammer formation indicates that bulls were successful in their attempt of stopping the prices from falling further down.
4. Therefore, analyst needs to look into buying opportunities as there is potential for reversal of trend after formation of Hammer.

All these above form a trade set up for a hammer i.e. if hammer does not form at the bottom end of prior downtrend then analyst need not consider it for his decision making purpose. 

The above same phenomenon can be observed even in the below HDFC Bank chart:


In the above HDFC bank chart, the candle is considered to be hammer even though there is slight presence of upper shadow but it is not longer than the real body and lower shadow length is longer than the real body. Also,  "Be flexible - quantify and verify" rule need to be considered. 

HANGING MAN

It is similar to the Hammer paper umbrellas except that it is formed at the top end of a uptrend and it gives the reversal signal of the uptrend. Even this candle has got small real body at the top end and it has got a lower shadow and the length of it is twice the length of the real body.


In the above ICICI bank chart, following observations can be made:

1. A candle with small real body with longer lower shadow formed which is more than twice the length of real body and therefore it qualifies as Hanging man even though there is presence of upper shadow which is of negligible length and it is acceptable due to the flexible rule.
2. Just the formation of hanging man candle is not sufficient, in order for the candle to be considered as hanging man there are two prerequisites which is the above 1st observation and 2nd being that it should occur at the top end of uptrend.
3. It indicates that bulls potentially lose their strength giving away their control to bears.
4. As there is possibility for reversal of trend, it  leads the trader to look for shorting the stock.


To summarize:

1. In order for a candle to be termed Hammer, it should have a small real body with longer lower shadow and it should form at the bottom end of downward rally which signals in reversal of trend.
2. In order for a candle to be termed Hanging man, it should also have a small real body with longer lower shadow and it is different from hammer because it is formed at the top end of upward rally which signals potential trend reversal.
3. Bets can be placed on Hammer and chances of reversal of trend after formation of hanging man is very less. In my opinion, logically speaking, in case of Hanging man, longer lower shadow means bears tried to get the price down but were unsuccessful in their attempt, then how can one expect for a reversal in trend, where as, in case of hammer, the logic seems correct.



It can be observed that, the candle has got small real body with longer lower shadow and it formed at the top end of uptrend but there is no reversal in trend, instead there is continuation of uptrend. This phenomenon seems more logical and possible to happen. Hence I place my bets on Hammer and not on Hanging man and it is my personal preference.










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