Chart and Candlestick Patterns
EstablishedRecognisable shapes in price history. Their reliability varies enormously and is worth checking.
Candlesticks were used by Japanese rice traders from the 18th century; Western chart patterns date from the early 20th.
What it claims
Patterns need volume to mean anything, and NEPSE turnover concentrates in a few shares — so most Nepali charts cannot support them. That certain shapes recur because the human behaviour producing them recurs, and that some of them carry a usable tendency about what happens next.
How it works
- 1A candlestick records the open, high, low and close of one period as a body with wicks.
- 2Single-candle forms — hammer, doji, marubozu, shooting star — describe one session's struggle.
- 3Multi-candle forms — engulfing, harami, morning and evening star — describe a shift over several.
- 4Larger formations — head and shoulders, double tops and bottoms, triangles — play out over weeks.
- 5The standard open-source library recognises 61 distinct candlestick patterns.
Reading a single candle
Candlestick charting came from Japanese rice traders and reached Western markets in the late twentieth century. One candle records four numbers — open, high, low, close — arranged so the session's struggle is visible at a glance.
What one candle records
- A long body means one side controlled the session.
- A long upper wick means buyers pushed price up and were pushed back.
- A long lower wick means sellers pushed price down and were rejected.
- A doji — open and close nearly equal — means neither side finished ahead.
Everything else in candlestick analysis is a combination of those four observations across two or three sessions.
Support, resistance and why patterns form
Support and resistance
Patterns are not magic shapes. They form because of what people do at prices they remember. Someone who bought at a high and watched it fall will often sell at break-even when price returns — which is why an old high acts as resistance.
Once a level breaks, the roles frequently swap: former resistance becomes support, because the people who were trapped are now out and the people who bought the breakout are defending it. Understanding the behaviour makes the patterns memorable instead of arbitrary.
The two reversal patterns worth knowing
Head and shoulders
Head and shoulders: three peaks, the middle one highest, with a neckline joining the lows. The story is a trend making one last push that fails, then failing to reach even the previous level. Traders treat a close below the neckline as the confirmation.
Double top
Double top: two attempts at the same level, both rejected. Simpler and more common. The information is in the second failure — buyers could not do again what they did before.
Both have inverted forms at market bottoms, which work the same way with the roles reversed.
How much to trust them
Patterns are the easiest part of technical analysis to learn and the easiest to over-trust. Three things keep them honest:
- 1Failure rates matter more than success rates. What you have to survive is the times it does not work. Any source that only shows you the winners is selling something.
- 2Volume has to agree. A textbook shape formed on a handful of trades describes nothing. This matters especially on thinly traded NEPSE stocks, where a pattern can be printed by a few orders.
- 3Context outranks shape. The same formation means different things in an established trend and in a directionless range.
The standard open-source library recognises 61 distinct candlestick patterns. You do not need to memorise them. Understanding the four single-candle observations above lets you read most of them on sight.
How much weight it can carry
Patterns are the easiest part of technical analysis to learn and the easiest to over-trust. The honest position is that they are tendencies with failure rates, not signals — and the failure rates matter more than the success rates, because that is what you have to survive. Bulkowski's Encyclopedia of Chart Patterns is in our library precisely because it measures them, including how often each one fails. Check before you assume.
Established. Widely documented and taught, but the primary texts are still in copyright, so we can point to them rather than host them.
On NEPSE specifically
Patterns need volume to mean anything, and thinly traded NEPSE stocks can print a textbook shape on a handful of trades. Check the volume behind a pattern before acting on it.
Read the source
Rather than take our summary on trust, check it against what the author wrote.
The vocabulary
The 16 terms you need to follow any discussion of this method.
- Candlestickalso: Candle
- A chart mark showing open, high, low and close for one period. The body is the open-to-close range; the wicks show the extremes.
- Doji
- A candle that opens and closes at nearly the same price, showing buyers and sellers evenly matched.
- Hammer
- A candle with a small body and a long lower wick, suggesting sellers pushed the price down and buyers pushed it back.
- Engulfing pattern
- A candle whose body completely covers the previous one, suggesting control has changed hands.
- Bullish engulfing
- A green candle whose body fully covers the previous red one, read as buyers taking control.
- Bearish engulfing
- A red candle whose body fully covers the previous green one, read as sellers taking control.
- Morning star
- A three-candle bottoming pattern: a long fall, a small indecisive candle, then a strong rise.
- Evening star
- A three-candle topping pattern: a long rise, a small indecisive candle, then a sharp fall.
- Shooting star
- A candle with a small body and long upper wick after a rise, suggesting buyers failed to hold the high.
- Harami
- A small candle contained within the previous larger one, suggesting momentum has stalled.
- Marubozu
- A candle with almost no wicks — one side controlled the whole session.
- Head and shoulders
- A three-peak pattern with a higher middle peak, traditionally read as a reversal of an uptrend.
- Double top
- Two failed attempts at the same high, read as a possible reversal.
- Double bottom
- Two failed attempts at the same low, read as a possible reversal.
- Three black crows
- Three consecutive long red candles, read as sustained selling.
- Chart pattern
- A recognisable shape in price history that some traders treat as predictive. Their reliability varies widely and is worth checking rather than assuming.
What the research says
2 paperson arXiv’s quantitative-finance archive that bear on this method. Preprints, so not all are peer-reviewed — read them as evidence to weigh, not as verdicts.
- AI Trading: Evaluating Large Language Models for Technical Market Analysis↗
Geofrey Ntale · 2026
Large Language Models (LLMs) have emerged as powerful tools for processing the heterogeneous information environments of modern financial markets. This paper presents a systematic, comparative evaluation of five prominent LLMs: GPT-4 Turbo, Claude 3 Opus, Gemini 1.5 Pro, Llama 3 70B, and the domain-specialized FinGPT, …
- Moving Mini-Max - a new indicator for technical analysis↗
Z. K. Silagadze · 2008
We propose a new indicator for technical analysis. The indicator emphasizes maximums and minimums in price series with inherent smoothing and has a potential to be useful in both mechanical trading rules and chart pattern analysis.
Metadata from arXiv, which places it in the public domain under CC0 1.0. The papers themselves remain at arXiv.