Technical Analysis · Field Notebook · Page 4 of set
Chapters 7 and 8 — Single Candlestick Patterns Part 3 and Multiple Candlestick Patterns Part 1. The paper umbrella (Hammer and Hanging Man), the Shooting Star, and the first two-candle pattern — the Engulfing — with its cousins Piercing and Dark Cloud Cover.
Notebook Summary · liftable, derivable from the notes below
| Hammer | Hanging Man | |
|---|---|---|
| Where | bottom of downtrend | top of uptrend |
| Prior trend | down | up |
| Bias | bullish → long | bearish → short |
| Stop-loss | low of candle | high of candle |
| Bullish Engulfing | Bearish Engulfing | |
|---|---|---|
| Where | bottom of downtrend | top of uptrend |
| P1 / P2 | red / big blue | blue / big red |
| Trade | long ~P2 close | short ~P2 close |
| Stop-loss | lowest low P1&P2 | highest high P1&P2 |
A long shadow is a story of a battle. Price pushed hard in one direction, then got shoved all the way back before the bell — someone stepped in with force. Where that battle happens on the chart decides what it means, and reading it is the whole of this page.
A paper umbrella is one shape with a strict rule: a small real body sitting at the top of the range, and a long lower shadow at least twice the length of the body — the shadow-to-body ratio. Colour does not matter; the ratio does.
Worked example: O 100, H 103, L 94, C 102. Body = C−O = 2. Lower shadow = O−L = 6. Since 6 ≥ 2×2, the ratio holds — it is a paper umbrella. The same physical candle earns two different names depending on where it lands.
At the bottom of a downtrend, the paper umbrella is a Hammer, a bullish signal. The story: bears drove price to a new low as usual, but at that low, buyers surged in and hauled price back up to close near the high — the long lower shadow is that rejection. The longer the shadow, the more bullish. A blue body is slightly more comforting, but any colour qualifies if the ratio holds. Buy near the close; the low is your stop. The prior downtrend is mandatory — a perfect-looking hammer with no prior downtrend is not a hammer.
The same umbrella at the top of an uptrend is a Hanging Man, a bearish signal. Bulls were in control making higher highs, but the long lower shadow shows bears finally made an entry, trying to break the bulls' grip. Short near the close; the high is your stop. Validation and risk-taker/risk-averse timing work exactly as with the hammer.
The shooting star flips the umbrella: small body at the bottom of the range with a long upper shadow (≥ 2× body) and little or no lower shadow. It is bearish, so the prior trend must be up. In an uptrend, price made a new high, then heavy selling pushed it back down to close near the low — the long upper wick is the failed rally. Longer wick, more bearish; a red body is slightly more reliable. Short near the close; the high is your stop.
In one breath: a small body with one long shadow marks a rejected extreme — hammer at a bottom (buy), hanging man and shooting star at a top (short), each stopped at the far end of the candle.
Single candles gave a signal from one session. Multiple candlestick patterns need two — sometimes three — sessions to form, so the opportunity evolves over days. The first is the engulfing pattern: a small candle on day 1 (P1) and a long candle on day 2 (P2) that swallows P1's body.
At the bottom of a downtrend. Prerequisites: prior trend down; P1 is a red candle (confirming bearishness); P2 is a blue candle long enough to engulf P1's body. The story: P2 opens near P1's close and tries for a new low, but sudden buying drives it to close above P1's open. The long blue candle rattles the unprepared bears. Buy near P2's close; stop at the lowest low of P1 and P2.
Validating P2 as bullish engulfing (risk taker, ~3:20 PM): CMP is above P1's open, and P2's open is at or below P1's close. Risk averse waits for the next day and only enters on a blue candle. The module's DLF example: P1 O163/C160, P2 O159.5/C169 → long at ~169, stop at P1's low 158.5.
At the top of an uptrend: P1 is a blue candle, P2 a red candle that engulfs it. P2 opens higher, tries for a new high, then unexpected selling closes it below P1's open — bulls get displaced. Short near P2's close; stop at the highest high of P1 and P2. The Ambuja Cements example: P1 O214/C218.75, P2 O220/C209.4 → short at ~209, stop at 221.
Combine what you know. Picture a bearish engulfing at the top of an uptrend, then a Doji on the next day (P3). On P2 the bulls panicked; on P3 they were uncertain (the Doji). Panic plus uncertainty is the recipe for a sharp move — which is why a long red candle often follows. When a Doji trails a recognisable pattern, the resulting opportunity tends to be bigger.
Two near-twins of the engulfings, differing only in how much P2 covers P1:
Stocks in the same sector move together but not identically. If negative banking news drops, ICICI Bank might fall 2% while HDFC Bank falls 1.5% — enough that one forms a full bearish engulfing and the other only a dark cloud cover the same day. Between the two, prefer the fuller pattern: a full engulfing is more pronounced than a partial one, so bullish/bearish engulfing beats piercing/dark cloud cover.
In one breath: engulfing patterns are a decisive day-2 candle swallowing day-1's body at a trend extreme — piercing and dark cloud cover are the partial versions, a trailing Doji amplifies them, and a fuller engulf beats a partial one.
Naming the engulfing on a clean diagram is the easy half. On a live chart it sits inside noise, and the hard question is not what it is but whether to trust it. First, read a chart: toggle the 5-day average to see the slide and the turn. Then take the exercise below — you decide before the future is revealed.
↗ This drill also lives in the Finance Lab — alongside the valuation calculator and real stock comparisons.
You cannot, from the candle alone — that is the point. The only difference is the prior trend. Look left: if the candle sits at the bottom of a downtrend it is a hammer (bullish); at the top of an uptrend it is a hanging man (bearish). Same shape, context decides.
It is the threshold that proves the rejection was decisive. A lower shadow twice the body means price travelled far against the eventual close and got fully reversed — a real fight, not a wobble. A short shadow could just be normal noise, so it would not qualify.
The module leans that way for multi-day patterns specifically, because waiting for the day after P2 pushes your entry far past the ideal price and makes the stop painfully deep. That said, "risk taker" here still means acting only after you have validated P2 near 3:20 PM — it is disciplined, not reckless.
Just the real bodies, in the module's practical view. The body holds the open and close — the prices that matter — so if P2's body covers P1's body, treat it as a valid engulfing. Purists want the whole candle covered, but the author is comfortable with body-only.
Because you will often only get the partial version — a real chart rarely serves the textbook ideal. They are still tradeable signals. And "fuller is better" is only a tie-breaker between two simultaneous setups; the later 6-point checklist can flip that preference.
Sequence of emotion. The engulfing already put the losing side into panic; the Doji the next day adds uncertainty on top. Panic plus uncertainty tends to break sharply in the pattern's direction, so the follow-through move is often larger than the engulfing alone would suggest.
Two only. Both run in your head or a scratch file — no software, no invented tools.
Two mini-tasks, both from the module's own numbers.
(a) single candle, sitting at the bottom of a downtrend:
O 100 H 103 L 94 C 102
(b) two candles at the bottom of a downtrend (DLF):
P1 O 163 H 168 L 158.5 C 160
P2 O 159.5 H 170.2 L 159 C 169(a) Step 1 — measure. Body = C−O = 102−100 = 2. Lower shadow = O−L = 100−94 = 6. Upper shadow = H−C = 103−102 = 1 (tiny, fine by rule 2).
(a) Step 2 — ratio + location. Lower shadow 6 ≥ 2×body (4) → paper umbrella. It sits at the bottom of a downtrend → it is a Hammer (bullish; buy ~close 102, stop = low 94).
(b) Step 1 — check the two conditions. P2 open (159.5) ≤ P1 close (160)? Yes. P2 close (169) > P1 open (163)? Yes — P2's blue body engulfs P1's red body. Prior trend is down. It qualifies as a bullish engulfing.
(b) Step 2 — entry and stop. Long near P2's close → ~169. Stop = lowest low of P1 and P2 = min(158.5, 159) = 158.5.
(a) body=2, lower shadow=6 -> 6 >= 2*2 -> paper umbrella
location = bottom of downtrend -> HAMMER (bullish)
buy ~102 stop = low 94
(b) P2 open 159.5 <= P1 close 160 ok
P2 close 169 > P1 open 163 ok -> bodies engulfed
prior trend down -> BULLISH ENGULFING
long ~169 stop = min(158.5,159) = 158.5A new trader reports back on Chapters 7–8. Four statements are wrong. Find each and correct it.
A. "This umbrella is at the top of an uptrend, so it's a bullish Hammer."
B. "A shooting star has a long lower shadow."
C. "For a bearish engulfing, I'll put my stop at the lowest low of P1 and P2."
D. "P2 only covered 60% of P1, so this bullish setup is worthless."A — wrong. An umbrella at the top of an uptrend is a Hanging Man (bearish), not a hammer. A hammer sits at the bottom of a downtrend. Fix: top of uptrend → Hanging Man, short it.
B — wrong. A shooting star has a long upper shadow (it is the inverted umbrella). Long lower shadow is the hammer/hanging-man family. Fix: shooting star = long upper shadow.
C — wrong. A bearish engulfing's stop is the highest high of P1 and P2. Lowest low is the bullish engulfing's stop. Fix: bearish stop = highest high.
D — wrong. 60% coverage (50–<100%) is a valid piercing pattern, traded just like a bullish engulfing. It is not worthless — only under 50% fails. Fix: 60% = piercing pattern, tradeable.
A wrong -> top of uptrend = HANGING MAN (bearish)
B wrong -> shooting star = long UPPER shadow
C wrong -> bearish engulfing stop = HIGHEST HIGH
D wrong -> 50-<100% = PIERCING pattern, tradeable