If the trader is a risk-taker, he can buy the stock the same day. The trader’s entry time depends on the risk appetite of the trader.A hammer formation suggests a long trade.The trade setup for the hammer is as follows: Hence one should look at buying opportunities. This action by the bulls has the potential to change the sentiment in the stock.The price action on the hammer formation day indicates that the bulls attempted to break the prices from falling further, and were reasonably successful.However, at the low point, some amount of buying interest emerges, which pushes the prices higher to the extent that the stock closes near the high point of the day.On the day the hammer pattern forms, the market as expected trades lower, and makes a new low.During a downtrend, every day the market would open lower compared to the previous day’s close and again closes lower to form a new low.The market is in a downtrend, where the bears are in absolute control of the markets.The thought process behind a hammer is as follows: The prior trend is highlighted with the curved line. The prior trend for the hammer should be a downtrend. However, it is slightly more comforting to see a blue-coloured real body. Notice the blue hammer has a very tiny upper shadow, which is acceptable considering the “Be flexible – quantify and verify” rule.Ī hammer can be of any colour as it does not really matter as long as it qualifies ‘the shadow to real body’ ratio. The chart below shows the presence of two hammers formed at the bottom of a downtrend. The longer, the lower shadow, the more bullish the pattern. A hammer consists of a small real body at the upper end of the trading range with a long lower shadow. The bullish hammer is a significant candlestick pattern that occurs at the bottom of the trend. As the length of the lower shadow is more than twice the real body hence we can conclude that a paper umbrella has formed. 102-100 = 2 and the length of the lower shadow is Open – Low, i.e. Here, the real body’s length is Close – Open, i.e. Let us look at this example: Open = 100, High = 103, Low = 94, Close = 102 (bullish candle). This is called the ‘ shadow to real body ratio’. To qualify a candle as a paper umbrella, the lower shadow’s length should be at least twice the length of the real body. If the paper umbrella appears at the top end of an uptrend rally, it is called the ‘Hanging Man’. If the paper umbrella appears at the bottom end of a downward rally, it is called the ‘Hammer’. A paper umbrella is characterized by a long lower shadow with a small upper body. The hanging man pattern is bearish, and the hammer pattern is relatively bullish. The interpretation of the paper umbrella changes based on where it appears on the chart.Ī paper umbrella consists of two trend reversal patterns, namely the hanging man and the hammer. The paper umbrella is a single candlestick pattern which helps traders in setting up directional trades.
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