Umbrella Lines
Umbrella lines are candles that show very long lower shadows and small bodies near the top of the trading range. This kind of candles is very interesting as it may be bullish or bearish, depending on price location. If it appears during a downtrend, it’s indicative of the end of it. In such places, we name it as a hammer. If it appears after a rally a hanging man.
There are three differences between a hammer and a hanging man.
- Trend: Hammers come after a downfall. A hanging man after a bull run.
- The magnitude of the move: Hammers are valid even after a small drop. For it to be a hanging man, the move should last longer.
- Confirmation: A hanging man should be confirmed, while a hammer not.
A note about candles in Forex
Trading pairs make umbrella candles kind of symmetrical. The stock asymmetry is tamed. A bull EUR/USD is a bear USD/EUR, so this confirmation stuff does not apply. We just need to realize that this kind signals work better when it goes with the prevailing trend, and need confirmation on the opposite direction.
Who’s in command?
We should always pay attention to the candles’ wicks because wicks expose the result of the fight between bulls and bears. Thus, if we observe several consecutive candles with large upper shadows while the trend is still up, is a sign that bears are starting to show up.
On the other hand, if there’s a downtrend, but long lower wicks with relatively small bodies start appearing, the continuation of the downtrend is under suspicion.
Usually, by just paying attention to where the most longer shadows are, we get the information of who’s in command. Although not always this translates into a trend change. It may just add volatility, but it would keep us away from the wrong side of the market. If we follow proper reward to risk ratios and use the oversold/overbought indications by %R, or Stochastics. we’ll increase our chance to head in the right direction.
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Reference: Steve Nison: Japanese Candlestick Charting Techniques