A paper umbrella is an effective candlestick pattern that allows traders to analyze market trends and determine price fluctuations. Proper understanding and utilizing the pattern requires you to work on chart analysis.
In this blog, we’ll explain the definition and types of paper umbrella candlestick patterns. Without any more delays, let’s start the blog!
What is the Paper Umbrella Candlestick Pattern?
Paper Umbrella Candlestick Pattern refers to a single candlestick pattern utilized by traders to determine future trends in the market and set up directional trades. It resembles the shape of an inverted umbrella over the analytical chart.
A paper umbrella has two trend reversal patterns: hanging man and Hammer.
Hanging Man reflects the bearish trend, and Hammer represents the bullish trend. Moreover, the candle’s lower shadow’s length should be at least two times the length of the real body. It is known as “the shadow-to-real body ratio,” and it is basically based on different types of umbrella candlestick patterns.
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Types of Paper Candlestick Patterns
Paper umbrella typically forms two types of candlestick patterns, mentioned below:
1. Hanging Man
Hanging Man is a bearish reversal candlestick pattern, signaling the market high. When an umbrella forms at the top of the trend, it would be called Hanging Man. It must be preceded by an uptrend. Plus, as soon as the hanging man qualifies the shadow to the real body ratio, other factors, like its color, won’t matter.
When the hanging pattern appears, it clearly indicates the failure of bulls attempting to push the price upward, and they only managed to take a single high point (or evening opening price sometimes). It leads the market to short the stock, where bears are making all the profits.
2. Hammer
Hammer is a bullish reversal candlestick pattern, signaling the market lows. Simply put, when an umbrella forms at the bottom of the downward rally, it is called a Hammer. It typically forms a small real body at the upper end of the trading range with a longer shadow. Longer shadow is directly proportional to the bullish pattern.
To form Hammer, the previous trend should be a downtrend. Here, the only qualifying requirement is shadow to real body ratio. There is no need for any specialized candlestick. However, it generally appears the real body consists of green, blue, or white color.
Before the formation of Hammer, bears were in complete control of the market, as they have been touching new lows every single day at opening, during, and closing times. When the Hammer pattern appears, it clearly indicates that bulls have successfully prevented the prices from falling further. This results in a positive trend.
Conclusion
Traders can potentially use the umbrella candlestick pattern to predict underlying asset movement and identify probable trend reversals. Ensure that these results are combined with other analyses, strategies, and risk management techniques to increase the chances of making profitable trades.
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