The name of this single candlestick pattern is the paper umbrella, because of its resemblance in shape to an umbrella. In the nomenclature and interpreting of these candles, the position of occurrence and of course the shape are important factors.The colour is insignificant in analysing these patterns as the difference between the opening and closing price is small, or in other words, the body is small.
A paper umbrella depending on the previous trend of the market can be termed as hanging man or hammer. The hanging man pattern is a bearish pattern while hammer pattern is a bullish pattern. Its characteristic features can identify a paper umbrella:
- Long lower shadow
- Small body.
If the paper umbrella appears after a downtrend, it is called ‘Hammer’.
If the paper umbrella appears after an uptrend, it is called ‘Hanging man’.
To verify that a candle is a paper umbrella, the length of the lower shadow should be minimum twice the length of the body.
The hammer is a bullish candlestick pattern that appears after a downtrend. A hammer has a small body at the upper end of the trading range with a long lower shadow. The longer, the lower shadow, the more bullish the pattern. A hammer can be of any colour as it does not matter. Still, it is a bit better to see a blue coloured body. On the day the hammer pattern is formed, the buyers are attracted, which moves the prices higher.
The hanging man is a bearish candlestick pattern that appears after an uptrend. It signals that a decrease in the price of the stock is on the cards.
Although both the hammer and hanging man are proper candlestick patterns, it has been observed that hammer has a greater success rate/efficiency as compared to hanging man. However, you must devise your strategies according to the observations that you make in the market.
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