Hammer, Hanging Man & Shooting Star

The paper umbrella is a single-candle pattern recognised by three distinct features:

• Small real body — the open and close are very close together, forming a compact body at the upper end of the trading range.
• Long lower shadow — the shadow below the body should be at least twice the height of the real body. This is the defining characteristic.
• Little or no upper shadow — ideally the candle has zero upper wick, though a tiny one is acceptable.

The shape looks like an umbrella with a handle hanging down — hence the name. On its own, this structure is neutral. What converts it into a trading signal is the prior trend. If it appears after a downtrend, it is called a Hammer. If it appears after an uptrend, it is called a Hanging Man.

The hammer is a bullish reversal signal that appears at the bottom of a downtrend. During the trading session, sellers pushed the price significantly lower, creating the long lower shadow. However, by the close, buyers stepped in aggressively and drove the price back near the open. This tug-of-war tells us that selling pressure is weakening and bulls are beginning to take control.

Why the Hammer Works

• Bears pushed the price down sharply during the day, but could not sustain the selling pressure.
• Bulls absorbed all the selling and drove the price back up near the open — a show of strength.
• The long lower shadow represents a failed attempt by bears, which often marks a sentiment shift.

Real Example — SBIN (State Bank of India)

Imagine SBIN has been falling steadily from Rs.620 to Rs.570 over five consecutive sessions. On the sixth day, the stock forms a candle with these characteristics:

The real body is tiny (Rs.580 to Rs.581 — just Re.1), the lower shadow stretches Rs.18 (from Rs.580 down to Rs.562), and there is almost no upper shadow. The lower shadow is 18x the body — well above the 2x minimum. This is a textbook hammer.

The next day, SBIN opens at Rs.583 and rallies to Rs.595 by the close, confirming the bullish reversal signalled by the hammer.

Trade Setup

• Entry: Buy above the hammer's high on the next day. In this case, a buy trigger above Rs.584.
• Stoploss: The low of the hammer candle — Rs.562.
• Risk per share: Rs.584 minus Rs.562 = Rs.22.

The hanging man has the exact same shape as the hammer — small body at the top, long lower shadow, and minimal upper shadow. The critical difference is context: the hanging man appears after an uptrend, making it a bearish warning signal.

During the session, sellers drove the price down significantly (creating the long lower shadow). While bulls managed to pull the price back up by close, the very fact that sellers could push prices down so far during an uptrend is concerning. It indicates that selling interest is emerging and the uptrend may be losing steam.

Real Example — BAJFINANCE (Bajaj Finance)

BAJFINANCE rallies from Rs.6,800 to Rs.7,350 over eight sessions. On the ninth day, the following candle forms:

The body is small (Rs.7,340 to Rs.7,330 — just Rs.10), and the lower shadow stretches Rs.130 (from Rs.7,340 down to Rs.7,210). The shadow is 13x the body. This is a hanging man appearing at the top of a strong rally.

Confirmation is Essential

The hanging man, unlike the hammer, needs next-day confirmation. You should wait for the following day to close below the hanging man's body. If the next day opens lower and closes bearish, the hanging man is confirmed. In the BAJFINANCE example, if the next day closes below Rs.7,330, the bearish signal is validated.

Trade Setup

• Entry: Sell (or exit longs) below the hanging man's low on confirmation day. Trigger below Rs.7,210.
• Stoploss: The high of the hanging man candle — Rs.7,355.

The shooting star is the inverted version of the paper umbrella. Its characteristics are a mirror image:

• Small real body — positioned at the lower end of the trading range.
• Long upper shadow — at least twice the height of the real body.
• Little or no lower shadow.

The shooting star appears after an uptrend and is a bearish reversal signal. During the session, bulls pushed the price to a new intraday high (the long upper shadow), but by the close, sellers had overwhelmed the buyers and pushed the price back down near the open. This rejection of higher prices is a strong sign of distribution.

Real Example — MARUTI (Maruti Suzuki)

MARUTI has been climbing from Rs.10,200 to Rs.11,000 over six sessions. On the seventh day, the following candle appears:

The body is tiny (Rs.11,020 to Rs.11,030 — just Rs.10). The upper shadow is Rs.230 (Rs.11,020 to Rs.11,250), which is 23x the body. The lower shadow is minimal (Rs.20). The long upper wick shows that buyers tried hard to push prices higher but were completely rejected. MARUTI declined to Rs.10,700 over the next three sessions.

Trade Setup

• Entry: Sell below the shooting star's low on the next day. Trigger below Rs.11,000.
• Stoploss: The high of the shooting star candle — Rs.11,250.

Here is a consolidated reference for all three patterns covered in this chapter: