The candlestick patterns most useful for swing trading are a small set of reversal and continuation signals, such as the hammer, engulfing patterns, morning and evening stars and the inside bar. None of them works on its own: a pattern is only worth acting on when it appears in the right place in the trend, at support or resistance, and with volume that backs it up.
This guide explains how to read a single candle, lists 12 patterns in one table, shows how to confirm them, and works through a hypothetical trade from entry to target with position sizing. It ends with the mistakes that cost swing traders the most and how short-term trading profits are taxed in India.
How to read a candlestick
Each candle shows four prices for one period: open, high, low and close (often shortened to OHLC). Swing traders, who hold positions for a few days to a few weeks, mostly use daily candles and check the weekly chart for the bigger trend.
- Body: the thick part between the open and the close. A green (or hollow) body means the close was above the open; a red (or filled) body means it closed below.
- Upper wick (shadow): the line from the top of the body to the day’s high. A long upper wick means buyers pushed the price up but sellers drove it back down.
- Lower wick: the line from the bottom of the body to the day’s low. A long lower wick means sellers pushed the price down but buyers absorbed it.
- Range: high minus low. A wide range shows a strong battle; a narrow range shows hesitation.
The relationship between body and wicks matters more than colour.
12 candlestick patterns swing traders use
Reversal patterns suggest the current move may be ending. Continuation patterns suggest a pause before the trend resumes. “Confirmation” means what you should see on the next candle or two before treating the signal as valid.
| Pattern | Type | What it suggests | Confirmation needed |
|---|---|---|---|
| Hammer | Bullish reversal | After a fall, a small body near the top with a lower wick at least twice the body: sellers were rejected | Next candle closes above the hammer’s high, ideally at support |
| Inverted hammer | Bullish reversal | After a fall, a small body near the bottom with a long upper wick: buyers are testing higher prices | A strong green candle closing above the inverted hammer’s body; weaker than a hammer, so needs clearer follow-through |
| Shooting star | Bearish reversal | After a rise, a small body near the low with a long upper wick: buyers were rejected | Next candle closes below the shooting star’s body, ideally at resistance |
| Hanging man | Bearish reversal | Same shape as a hammer but after a rise: selling pressure has appeared | A red candle closing below the hanging man’s body; unreliable without it |
| Bullish engulfing | Bullish reversal | A green body completely covers the previous red body: buyers have taken control | Higher-than-average volume on the engulfing day; next close holds above its midpoint |
| Bearish engulfing | Bearish reversal | A red body completely covers the previous green body: sellers have taken control | Higher volume; next close stays below the engulfing candle’s midpoint |
| Morning star | Bullish reversal (3 candles) | Long red candle, small-bodied candle, then a green candle closing well into the first candle’s body | Third candle closes above the midpoint of the first; rising volume on day three |
| Evening star | Bearish reversal (3 candles) | Long green candle, small-bodied candle, then a red candle closing well into the first candle’s body | Third candle closes below the midpoint of the first; rising volume on day three |
| Doji | Indecision (possible reversal) | Open and close almost equal: neither side is winning | Direction of the next candle; matters only after a strong move or at a key level |
| Piercing line | Bullish reversal | After a red candle, a green candle opens lower and closes above the red body’s midpoint | Follow-through close higher; stronger at support |
| Dark cloud cover | Bearish reversal | After a green candle, a red candle opens higher and closes below the green body’s midpoint | Follow-through close lower; stronger at resistance |
| Three white soldiers / three black crows | Reversal (or strong momentum) | Three long candles in a row in one direction, each closing near its high (soldiers) or low (crows) | Should start from a base or a top, with rising volume; after a long run they can mark exhaustion instead |
| Inside bar | Continuation (sometimes reversal) | A candle whose high and low sit entirely inside the previous candle’s range: the market is coiling | A close beyond the mother candle’s high or low; trade in the direction of the main trend |
Gaps between candles are common in Indian stocks because overnight news moves prices before the open. Textbook definitions of the morning star and piercing line often assume a gap; treat the body relationships as more important.
Confirming a pattern: trend, levels and volume
A candle shape is a clue, not a signal. Before acting, run each setup through three filters. If you are unsure how much weight chart reading deserves at all, our piece on whether technical analysis can make money covers the evidence.
1. Trend
Define the trend first, using the weekly chart or a simple tool like the 50-day and 200-day moving averages. A bullish pattern during a pullback in an uptrend has the odds on its side. The same bullish pattern in a stock making lower highs and lower lows is a bet against the trend and usually fails.
2. Support and resistance
Support is a price zone where buying has previously stopped a fall; resistance is where selling has previously capped a rise. A hammer at a prior swing low or a rising moving average carries real information. A hammer in the middle of nowhere does not, because there is no reason for buyers to defend that price.
3. Volume
Compare the pattern day’s volume with the 20-day average. An engulfing candle on volume well above average shows larger players were involved. The same candle on thin volume, for example in a holiday-shortened week, deserves less trust.
Pre-trade checklist
- Is the pattern in the direction of the weekly trend?
- Is it at a clear support or resistance level?
- Is volume above its 20-day average on the signal candle?
- Has the confirmation candle closed, not just traded intraday?
- Is there a logical stop-loss level and a target at least twice as far away as the stop?
- Are results or other big events due during the holding period?
Worked example: a bullish engulfing trade
This example is hypothetical. Suppose Ravi has a trading account of ₹5,00,000 and follows a rule of risking no more than 1% of capital on any single trade.
A large-cap stock (call it Stock X) is in an uptrend above its rising 50-day moving average. It pulls back to ₹480, a level where it bounced twice in the past three months. On the daily chart it forms a bullish engulfing candle: low ₹472, high ₹495, close ₹494, on volume about 1.8 times its 20-day average.
Step 1: set entry, stop and target
- Entry: a buy-stop order at ₹496, just above the pattern high, so the trade triggers only if buyers follow through.
- Stop-loss: ₹469, just below the pattern low of ₹472. If price breaks there, the setup has failed.
- Target: ₹550, the most recent swing high, where sellers may reappear.
Risk per share = ₹496 − ₹469 = ₹27. Reward per share = ₹550 − ₹496 = ₹54. The reward-to-risk ratio is ₹54 ÷ ₹27 = 2:1.
Step 2: size the position with the 1–2% rule
The 1–2% rule caps the loss on one trade at 1–2% of trading capital. The number of shares comes from the risk, not from how much money is available.
| Item | At 1% risk | At 2% risk |
|---|---|---|
| Maximum risk (₹5,00,000 × risk %) | ₹5,000 | ₹10,000 |
| Shares (max risk ÷ ₹27, rounded down) | 185 (5,000 ÷ 27 = 185.2) | 370 (10,000 ÷ 27 = 370.4) |
| Position value (shares × ₹496) | ₹91,760 | ₹1,83,520 |
| Loss if stopped out (shares × ₹27) | ₹4,995 | ₹9,990 |
| Profit if target hit (shares × ₹54) | ₹9,990 | ₹19,980 |
At 1% risk, Ravi buys 185 shares worth ₹91,760, about 18% of his account.
Step 3: understand the odds
With a 2:1 reward-to-risk ratio, Ravi breaks even before costs if he wins one trade in three: one win of ₹9,990 offsets two losses of ₹4,995. That is why a modest win rate can still work, and why taking trades with poor reward-to-risk is so damaging.
These figures ignore brokerage, securities transaction tax (STT), stamp duty and other charges, which reduce every result. A stop-loss also does not guarantee the exit price: if Stock X opens at ₹455 after bad news, the stop fills near ₹455 and the loss is ₹41 a share, not ₹27.
Common mistakes with candlestick patterns
- Trading the shape without context. A hammer in a downtrend with no support nearby is just a candle.
- Acting before the candle closes. A hammer at 2 pm can become a plain red candle by 3:30 pm. Wait for the close and for confirmation.
- Moving or skipping the stop-loss. Widening a stop “to give it room” turns a planned 1% loss into a 4% loss.
- Sizing by conviction instead of risk. Doubling up because a pattern “looks perfect” breaks the whole risk model.
- Using patterns on illiquid stocks. Thinly traded small caps produce erratic candles and wide spreads. Our article on why to stay away from penny stocks explains the risks.
- Holding through results. Quarterly results can gap a stock far beyond any stop-loss.
- Not keeping a trade journal. Without records of every setup, entry, exit and reason, you cannot tell which patterns actually work for you.
For broader habits that protect capital, see our guide on how to avoid losing money in the stock market.
How swing trading profits are taxed in India
Profit from swing trades in delivery-based equity can be taxed in one of two ways, and which one applies depends largely on how often and how much you trade.
- Short-term capital gains (STCG): listed shares sold within 12 months, with STT paid, are taxed at a flat 20% plus applicable surcharge and 4% cess. This rate has applied since 23 July 2024 and Budget 2026 did not change it.
- Business income: if trading is frequent and systematic enough to amount to a business, profits are added to your income and taxed at your slab rate. Expenses such as internet, advisory subscriptions and a share of devices can be deducted, and you file ITR-3. Delivery trades are treated as non-speculative business; intraday equity trades are speculative business, which has separate loss rules.
In the example above, if Ravi’s ₹9,990 profit is treated as STCG, the tax is ₹9,990 × 20% = ₹1,998, or about ₹2,078 with 4% cess. As business income, it would be taxed at his slab rate after deducting expenses.
What CBDT Circular 6/2016 actually allows
Because the line between investor and trader caused years of disputes, the Central Board of Direct Taxes (CBDT) issued Circular No. 6/2016 on 29 February 2016 for listed shares and securities. It gives taxpayers a choice, but the choice is narrower than often claimed:
- If you opt to treat listed shares as stock-in-trade, the income is accepted as business income, whatever the holding period.
- If you held listed shares for more than 12 months and choose capital gains, the tax officer will not dispute it. Once you take this stand, you must stick to it in later years.
- In all other cases, the character of the income is decided on the facts, using CBDT’s earlier guidance (such as frequency, volume, holding period and intention).
Swing trades are held for days or weeks, so they fall in the first or third bucket, not the second. In practice, an occasional swing trader usually reports STCG, while someone trading actively through the year may be treated as running a business. The circular also does not protect sham transactions. The circular also recognises that one person can hold shares both as investments and as stock-in-trade, so keep the two portfolios clearly separate in your records.
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and renumbered most sections, so check current practice with a chartered accountant before choosing a treatment. For ways to legally reduce what you pay on long-term holdings, see our guide on reducing capital gains tax on shares.
FAQ
Which candlestick pattern is most reliable for swing trading?
No single pattern is reliable in isolation. Engulfing patterns and morning or evening stars are popular because they show a clear shift in control over one to three days. Their reliability depends far more on trend, location and volume than on the shape itself.
Should I use daily or hourly candles for swing trades?
Most swing traders use daily candles for signals and the weekly chart for trend. Hourly charts can help fine-tune entries, but they produce many more false signals. Holding for days means the daily close matters most.
How is swing trading different from intraday trading?
Swing trades are held overnight for days or weeks and usually involve taking delivery, while intraday positions are closed the same day. Swing traders face overnight gap risk but trade less often and pay fewer charges. Our article on whether you can make money in intraday trading covers the same-day side.
Where should I place the stop-loss on a candlestick setup?
A common approach is just beyond the pattern’s extreme: below the low of a bullish pattern or above the high of a bearish one. If that stop is so far away that the reward-to-risk falls below about 2:1, skip the trade rather than tighten the stop artificially.
Can I choose between STCG and business income for swing trading?
Partly. Under CBDT Circular 6/2016 you may always opt to treat listed shares as stock-in-trade (business income). The undisputed capital gains option applies only to shares held for more than 12 months, so for short holdings the facts of your trading pattern decide, and a tax professional’s advice is worthwhile.
Ramesh Iyer is the pen name of the founder and editor of StocksInfo.AI, an independent investor in Indian equities, mutual funds and ETFs since 2020. Every article is researched from primary sources such as SEBI, AMFI, NSE and the Income Tax Department, and fact-checked before publishing. About us