Paper Umbrella

The paper umbrella is a single candlestick pattern which helps traders in setting up directional trades. The interpretation of the paper umbrella changes based on where it appears on the chart.

A paper umbrella consists of two trend reversal patterns, namely the hanging man and the hammer. The hanging man pattern is bearish, and the hammer pattern is relatively bullish. A paper umbrella is characterized by a long lower shadow with a small upper body.

If the paper umbrella appears at the bottom end of a downward rally, it is called the ‘Hammer’.

If the paper umbrella appears at the top end of an uptrend rally, it is called the ‘Hanging Man’.

To qualify a candle as a paper umbrella, the lower shadow’s length should be at least twice the length of the real body. This is called the ‘shadow to real body ratio’.

Example: Open = 100, High = 103, Low = 94, Close = 102 (bullish candle).

Real body’s length = Close – Open = 102 – 100 = 2
Lower shadow length = Open – Low = 100 – 94 = 6
Since 6 > 2×2, a paper umbrella has formed.

The Hammer Formation

The bullish hammer is a significant candlestick pattern that occurs at the bottom of the trend. A hammer consists of a small real 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, but a blue body gives added comfort.

The prior trend for the hammer should be a downtrend. The thought process behind a hammer:

• Market is in a downtrend; bears dominate.
• On the hammer day, market makes a new low but recovers.
• Closing near the high shows bulls stepped in.
• It indicates a potential trend reversal to bullishness.

Trade setup:
Risk-taker: Can enter the trade the same day after 3:20 PM if criteria are met.
Risk-averse: Waits for the next day and enters only if it's a blue candle day.
Conditions:

• Open and Close nearly equal (within 1–2%).
• Lower shadow at least 2× the real body.

The low of the hammer acts as a stop-loss.

The Hanging Man

When a paper umbrella appears at the top of a trend, it's called a Hanging Man—a bearish reversal signal.

• Seen at the top of an uptrend.
• Shows bears entering the market via a long lower shadow.
• Indicates weakening bull momentum and potential reversal.

Trade setup:
Risk-taker: Short the same day at close.
Risk-averse: Waits till next day to confirm a red candle.

The high of the candle becomes the stop-loss.

My Experience with the Paper Umbrella

I prefer trading the hammer over the hanging man. The hammer shows bulls overcoming selling pressure, but in a hanging man, if the bears were dominant, why did the price still rise?

Your experience should shape your bias. Observe and develop your thesis to improve market understanding.

The Shooting Star

The shooting star is a bearish single candlestick pattern that appears at the top of an uptrend. It looks like an inverted paper umbrella with a long upper shadow and a small real body.

The colour doesn’t matter, but a red body adds strength. The upper shadow must be at least twice the size of the real body.

Thought process:
Bulls push the price higher, making a new high.
Bears enter and push the price near the low.
Bears show dominance—potential short signal.

Trade setup:
Risk-taker: Short on the same day near close.
Risk-averse: Wait till next day and enter if a red candle forms.
Stop-loss: High of the pattern.

Key Takeaways

• Paper umbrella = Long lower shadow + small real body.
• Shadow should be ≥ 2 × real body (shadow-to-body ratio).
• Hammer = bullish reversal (bottom of downtrend).
• Hanging man = bearish reversal (top of uptrend).
• Shooting star = bearish reversal (top of uptrend).
• Hammer's low = stop-loss for long trade.
• Hanging man’s and shooting star’s high = stop-loss for short trade.
• Always wait for confirmation or risk manage accordingly.