One of the benefits of using candlestick charts is the early recognition of trend reversal or at least reversal in the recent direction of the market. A candlestick reversal pattern could consist of one candle or more candles. This lesson discusses Umbrella Lines which are one-candle patterns.
What is an Umbrella Line
As the name implies an Umbrella Line is a candle that looks like an umbrella with a small real body and a long lower shadow. In such candles the upper shadow does not exist or is very small. The real body is also very small comparing to the lower shadow. If you are not familiar with the elements of candlesticks click here.
The following image shows two typical umbrella lines.
The common characteristics of Umbrella Lines are as follows:
- The upper shadow does not exist or it is very small.
- The size of the real body is less than half size of the lower shadow.
- The color of the real body is not important. Therefore the real body could be either bullish or bearish.
There are two varieties of Umbrella Lines:
- Hanging Man
A hammer usually appears at the bottom of a downtrend. It could be one of the first signs of reversal to an uptrend. The following image shows a typical hammer. You can find hammers quite often in Forex charts.
Even if the Hammer does not appear at the end of an actual downtrend it could mean a temporary price rally. So if the price has headed down for a while it could now move up for a while. I have seen cases that hammer shows up as a continuation pattern but in general we consider it as a reversal pattern.
The most important characteristic of Hammer is that it always forecasts a rally. We can use some other tools to confirm this forecast prior to jumping to a long trade. Remember that technical analysis is more of an art than a science so there is no guarantee that the patterns you see result in profit.
A Hanging Man usually appears at the end of an uptrend. It is usually one of the first signs of reversal to a downtrend. I have rarely seen this pattern in Forex charts but when it appears it is usually a powerful sign of exiting a long trade or even entering a short trade (see image).
Remember that a Hanging Man pattern means the market direction would head south very soon. I also suggest that you use other technical or fundamental tools to confirm this pattern.
Analyzing Umbrella Lines
In an effort to locate Umbrella Lines in a chart I have made the following assumptions:
- The size of the upper shadow is less than 5% of the total size or rather range of the candle
- The size of the real boy is less than 30% of the total size or rather range of the candle
To be able to locate Hanging Man and Hammer patterns I also added the following conditions.
- An Umbrella Line is a Hanging Man if its High is higher than the High of the adjacent candles
- An Umbrella Line is a Hammer if its Low is lower than the Low of the adjacent candles
The result was an indicator called UmbrellaLines which shows three types of Umbrella Lines.
- Neutral Umbrella Lines which do not indicate the direction of the market but could be used in other technical studies
- Hammers which are bullish
- Hanging Men which are bearish
The following image shows a sample chart that contains all three types of Umbrella Lines
From programming point of view this indicator accepts one input which is the bar or rather the candle number. It then returns either 0 or a positive value. If it returns a positive value you are dealing with an Umbrella Line (any type).
From a trader's point of view this indicator locates Umbrella Lines on the chart. The shape of the arrow helps you to recognize the pattern.
In order to use the UmbrellaLines indicator you also need to download a second indicator called CandleParamsLite. The download links shown above let you download both indicators. You can place them in the ...expertsindicators folder and then use the UmbrellaLines indicator. The CandleParamsLite indicator is very similar to the one that I introduced in the Lesson 1. The source codes of all these indicators are available to my paid students only. Click here for more information about my MQL4 course.
If you are not familiar with using custom indicators click here to watch a video.
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