In this Forex trading course segment we will analyse umbrella lines in more detail. These lines appear on a regular basis in Forex charts or any other chart you are likely to come across in your Forex training. This is why umbrella lines are amongst the most commonly known candlesticks but more importantly they are analysed and used by Forex traders on a daily basis.
Whilst various Forex trading courses have numerous definitions, our aim will be to keep it simple. Umbrella lines are candlesticks with small real bodies and long lower shadows. The defining feature however is that umbrella lines have real bodies at the top of the trading session hence giving them an ‘umbrella’ like look and feel. They are frequently seen in trend lines and reversals giving them the ability to be viewed as either bullish or bearish, depending on the Forex market’s behaviour.
There are two types of umbrella lines that we will discuss in this article; Hammer and Hanging Man:
Throughout your Forex training it is essential to know that a hammer appears at the end of a down-trend. That is, if a hammer appears during a down-trend you should keep an eye on the Forex chart to see if the direction of the trend will change. The hammer alone will not cause a change but in this article we are simply focusing on its characteristics. In this Forex trading course article the aim is to create an understanding that a hammer plays a significant role in creating trend reversals. At some point in the session the candlestick starts off as a long black candle, mirroring the bears’ strength. However, once it reaches a bottom, the bulls take control and push the stock further upwards. This action creates a long lower shadow and the candle finishes off the session as a hammer. Note that the shadow itself has to be double the size of the real body to qualify as a hammer. Consequently, the candle looks like a hammer due to its head and handle.
The Hanging Man
Another essential part of your Forex education is to understand the value of the hanging man. Whilst the shape is identical to the hammer, a hanging man appears at the top of a trend rather than the bottom. The reason why it is called a hanging man is because of the notion it looks like a person with legs hanging from the body.
Whilst it is not common, the same candlestick can in fact be a bullish and a bearish symbol. This is why the colour of the body is not important in umbrella lines. Remember that if the candle has a long upper shadow, it does not qualify as an umbrella but rather a spinning top. More importantly, a hanging man is much more valid when it appears at the end of a long rally but a hammer is valid even after a small decline in trend. At the same time, you should never depend purely on these candlesticks. A latter confirmation candle should be analysed in detail to understand if the trend is about to change direction.