NISM-Series-XV: Research Analyst · Technical Analysis

Chart Patterns and Candlestick Patterns for NISM Research Analyst

Updated 11 October 2026 · Fact-checked

Chart patterns are shapes formed by price on a chart that hint at the next move. Reversal patterns, such as head and shoulders or double top, signal a trend change. Continuation patterns, such as triangles, signal a pause before the trend resumes. Candlestick patterns read single or multi-day price action. Identify the prior trend first, then the pattern.

Understand Chart Patterns and Candlestick Patterns

Technical analysts believe price action repeats because crowd behaviour repeats. When buyers and sellers fight, price draws recognisable shapes. These shapes are called chart patterns. They help you judge whether the existing trend will turn or carry on.

There are two broad groups. A reversal pattern shows that the current trend is losing strength and may change direction. It needs a prior trend to reverse. A continuation pattern shows a pause or consolidation, after which the earlier trend is expected to resume. The same shape can mean different things depending on the trend before it, so always check the prior trend first.

Common reversal patterns: head and shoulders (three peaks, the middle one highest, with a neckline joining the two troughs; a top reversal that follows an uptrend), inverse head and shoulders (the mirror image at a bottom), double top (two peaks at about the same level, bearish), double bottom (two troughs at about the same level, bullish), and triple top or bottom. The signal is confirmed when price breaks the neckline or the trough or peak between the two highs or lows. Volume usually rises on the breakout.

Common continuation patterns: triangles (symmetrical, ascending, descending), flags, pennants and rectangles. A symmetrical triangle has converging trendlines and usually continues the earlier trend. An ascending triangle has a flat top and rising bottom and is generally bullish. A descending triangle has a flat bottom and falling top and is generally bearish. A flag or pennant is a short pause after a sharp move.

A gap is an area on the chart where no trading took place: today's range lies fully above or below yesterday's range. Types: common gap (in a quiet range, little significance), breakaway gap (breaks out of a pattern, starts a trend), runaway or continuation gap (in the middle of a strong trend) and exhaustion gap (near the end of a trend, warns of a reversal). Gaps are often considered support or resistance areas.

Candlesticks show open, high, low and close. The body is the open-to-close range; the thin lines are shadows. Key ones: doji (open and close almost equal, shows indecision), hammer (small body at the top, long lower shadow, after a downtrend, bullish), hanging man (same shape after an uptrend, bearish), shooting star (small body at the bottom, long upper shadow, after an uptrend, bearish), bullish engulfing (a large bullish body covers the prior bearish body, after a downtrend), bearish engulfing (the reverse, after an uptrend), morning star (bullish three-candle reversal) and evening star (bearish three-candle reversal).

Key formulas to remember

Head and shoulders: Left shoulder → Head (highest) → Right shoulder; neckline joins the two troughs; Bearish reversal after an uptrend. Confirmed when price closes below the neckline.
Inverse head and shoulders: Three troughs, middle one lowest; neckline joins the two peaks; Bullish reversal after a downtrend. Confirmed on a break above the neckline.
Price target from a head and shoulders (common rule of thumb): Target ≈ Neckline − (Head − Neckline); A measuring guide, not a guarantee. For the inverse pattern, add the distance to the neckline.
Double top / double bottom: Double top: two peaks at similar levels (bearish). Double bottom: two troughs at similar levels (bullish); Confirmed by a break of the intervening trough (top) or peak (bottom).
Triangles: Ascending: flat top, rising lows (bullish). Descending: flat bottom, falling highs (bearish). Symmetrical: converging lines, usually continuation; Trade in the direction of the breakout.
Gap types: Common, breakaway, runaway (continuation), exhaustion; Breakaway starts a move, runaway occurs mid-trend, exhaustion appears near the end.
Single candlestick signals: Doji = indecision; Hammer = bullish after downtrend; Hanging man and shooting star = bearish after uptrend; Context decides the meaning, not the shape alone.
Engulfing and star patterns: Bullish engulfing, morning star = bullish. Bearish engulfing, evening star = bearish; Engulfing is a two-candle pattern; stars are three-candle patterns.

How to solve Chart Patterns and Candlestick Patterns questions

Use this order for any pattern question in the exam.

1Read what the question gives: a description of a shape, a candle, or a gap.
2Find the prior trend. Up, down or sideways? This decides if a pattern is a top or a bottom.
3Classify the pattern: reversal or continuation.
4Match the shape to its name using its defining features (number of peaks, flat or sloping lines, body and shadow sizes).
5Decide the implied direction: bullish or bearish.
6Look for the confirmation the option mentions, such as a neckline break or a rise in volume.
7Eliminate options that mismatch the trend, such as a bullish label on a top pattern.

Quickest way: Trend plus shape shortcut

When to use it: When you have about a minute and the question asks you to name or classify a pattern.

Ask: what came before? Uptrend means only bearish reversal patterns can apply.
Count peaks or troughs: two means double top or bottom, three with a higher middle means head and shoulders.
Look at the lines: converging means triangle, flat top means ascending triangle.
For candles, look at the shadow: long lower shadow with small body is a hammer; equal open and close is a doji.
Pick the option matching direction and group, and drop the rest.

Common mistakes in Chart Patterns and Candlestick Patterns

Calling a hammer and a hanging man the same signal.
Both have the same shape, so students ignore the trend.
Fix: Hammer appears after a downtrend and is bullish. Hanging man appears after an uptrend and is bearish.
Treating a triangle as always a reversal.
Students link breakouts with trend change.
Fix: Triangles are mainly continuation patterns. Ascending is generally bullish and descending generally bearish; the symmetrical one usually follows the prior trend.
Reading a head and shoulders as confirmed once the right shoulder forms.
The shape looks complete.
Fix: The pattern is confirmed only when price breaks the neckline. Until then it is a warning.
Treating a doji as a bullish or bearish signal by itself.
Students want a direction from every candle.
Fix: A doji shows indecision. It matters mostly after a strong trend, as a hint of possible change.
Mixing up gap types, especially runaway and exhaustion.
Both occur in strong moves and look alike.
Fix: Runaway gaps appear mid-trend and show strength. Exhaustion gaps appear near the end and warn of a reversal. Breakaway gaps leave a pattern.
Using a double top as a bullish pattern.
Students confuse it with double bottom.
Fix: Top means peaks, bearish, after an uptrend. Bottom means troughs, bullish, after a downtrend.

Worked examples

Example 1

A stock has risen steadily and then forms three peaks. The middle peak is the highest, and the two outer peaks are at similar heights. A line joining the two troughs is the neckline. Price then closes below the neckline on higher volume. What does this indicate?
A) Bullish continuation
B) Bearish reversal
C) Bullish reversal
D) Indecision with no signal

Show the solution

Prior trend: an uptrend.
Shape: three peaks with the middle highest is a head and shoulders top.
Group: it is a reversal pattern, not a continuation.
Confirmation: the close below the neckline on higher volume confirms it.
Direction: after an uptrend, a confirmed top means bearish.

Answer: B) Bearish reversal

Example 2

After a prolonged fall in a share price, a candle forms with a small body near the top of its range and a long lower shadow. Which is the best description?
A) Hanging man, bearish
B) Hammer, bullish
C) Shooting star, bearish
D) Doji, a confirmed continuation of the fall

Show the solution

Prior trend: a downtrend.
Shape: small body at the top and a long lower shadow.
That shape after a downtrend is a hammer.
A hanging man has the same shape but follows an uptrend, so A is wrong.
A shooting star has a long upper shadow, so C is wrong.
A doji has almost equal open and close and signals indecision, not a confirmed continuation, so D is wrong.

Answer: B) Hammer, bullish

Exam tips

Always read the prior trend in the question. Many trap options use the right shape with the wrong direction.
Know the one-line meaning of each pattern: group (reversal or continuation) plus direction (bullish or bearish).
Remember that confirmation, such as a neckline break or breakout on volume, is what turns a shape into a signal.
Learn the four gap types by where they occur: leaving a pattern, mid-trend, near the end, or in a quiet range.
Technical Analysis carries a large share of the XV paper and wrong answers carry negative marking, so skip only if you cannot eliminate any option.

Practice questions from Technical Analysis

Chart Patterns and Candlestick Patterns: frequently asked questions

What is the difference between reversal and continuation patterns?

A reversal pattern signals that the prevailing trend may end and turn the other way. A continuation pattern signals a pause, after which the trend is expected to resume. Head and shoulders and double tops are reversals. Triangles, flags and pennants are mostly continuations.

How do you trade a head and shoulders pattern?

Traders wait for price to break the neckline, ideally with higher volume, before acting. A common rule of thumb measures the head-to-neckline distance and projects it from the neckline for a target. It is a guide, not a guarantee, and many use a stop above the right shoulder.

What are gaps in technical analysis?

A gap is an area on the chart where no trades took place, so price jumps from one level to another. Common gaps are minor. Breakaway gaps start a move, runaway gaps appear mid-trend, and exhaustion gaps warn that a trend may be ending.

What do doji, hammer and engulfing candles mean?

A doji has almost equal open and close and shows indecision. A hammer after a downtrend is bullish. An engulfing pattern is a large candle whose body covers the previous one: bullish after a downtrend, bearish after an uptrend.