Candlestick and Chart Patterns

1. What a pattern is, and what it is not

A candlestick pattern is a shape made by one, two or three candles that suggests what buyers and sellers were doing recently. Patterns are descriptions of past behaviour with a tendency toward a likely next move. They are not predictions, and they do not work on their own. A pattern is useful only when you place it in context and wait for confirmation.

2. The four questions to ask before any pattern

• Where is it? Is it at a support or resistance level, or in the middle of nowhere?
• What came before? Reversal patterns need a prior trend to reverse. A hammer in a sideways market means little.
• What confirms it? A close beyond the pattern's high or low, on good volume, is the usual confirmation.
• What if it is wrong? Where is your stop-loss, and is the position small enough that a wrong pattern costs an acceptable amount?

3. Single-candle patterns

These use one candle. They are the easiest to spot and the easiest to misread, so they need the most context. The key feature is the relationship between the body and the wicks.

• Hammer and hanging man: a small body at the top with a long lower wick. The same shape means different things depending on whether it comes after a fall (hammer) or a rise (hanging man).
• Inverted hammer and shooting star: a small body at the bottom with a long upper wick. After a fall it can be bullish; after a rise it is a warning.
• Doji: open and close nearly equal, showing balance. Its meaning depends on the trend and the next candle.
• Marubozu: a candle with no wicks, showing strong control by one side for the whole period.

4. Two-candle patterns

Two candles together show a change in the balance between buyers and sellers. The second candle must respond to the first.

• Bullish and bearish engulfing: the second body fully covers the first. Strong because the reversal is clear in one step.
• Bullish harami: a small candle sits inside the body of a large opposite candle. It signals the selling is losing strength, but it is a warning, not a trigger.
• Piercing line and dark cloud cover: the second candle opens beyond the first and closes past its midpoint. Partial reversals, usually weaker than engulfing.

5. Three-candle patterns

Three candles show a more complete story: a move, a pause, and a reversal or continuation. They are often more reliable than one- or two-candle patterns, but they also take longer to form.

• Morning star (bullish): a large red candle, a small candle with a gap, then a large green candle closing above the midpoint of the first.
• Evening star (bearish): the mirror image after an uptrend.
• Three white soldiers and three black crows: three strong candles in the same direction, each closing further in that direction. Signals a strong trend has started.

6. Chart patterns: slower, larger shapes

Chart patterns form over days to months. Head and shoulders, double tops and bottoms, triangles, flags and cup and handle are built from many candles. They define a level (the neckline, the rim or the trend line) and a breakout. The trade is the breakout, not the shape. Many chart patterns fail, so wait for the close beyond the level, check volume, and measure the target from the pattern's height only as a rough guide.

7. Confirmation: the rule that prevents most losses

Confirmation means waiting for evidence that the pattern is working before committing money. For a bullish reversal, a common rule is: the next candle closes above the pattern's high, with volume above its average. Entering earlier gives a better price but more false signals. Entering later costs some of the move but reduces losses from failed patterns.

8. A complete example

A stock has fallen for ten sessions. On day 11 a hammer forms at a level where price bounced twice before (support). On day 12 the price closes above the hammer's high with volume 1.5 times average. A trader buys at ₹252 with a stop at ₹244, just below the hammer's low, and a target at the previous resistance of ₹268. Risk is ₹8 per share and reward is ₹16, a 1:2 ratio. The numbers are illustrative; the process is what matters.

9. Common pattern mistakes

• Trading every pattern you see. Most patterns are noise; only those at key levels with a trend matter.
• Entering before confirmation because the pattern looks perfect.
• Forcing a pattern onto a chart that does not show it clearly.
• Ignoring the broader market. A bullish pattern in a falling market fails more often.
• Using a single pattern as your whole strategy.

10. How to practise

Mark patterns on past charts and write down what happened next, without the outcome shaping your memory. After 30 to 50 examples of one pattern, you will know whether it works in the market and stocks you follow. Keep a journal with the pattern, context, confirmation, result and mistake.