What is the Piercing Candlestick Pattern?

What is the Piercing Candlestick Pattern?

Piercing Candlestick Patterns are bullish reversal patterns that appear at the end of a downtrend to suggest a potential change in market sentiment. This pattern is often interpreted as a potential buying opportunity in anticipation of further upward movement. The reliability of this pattern increases when it is combined with other analytical tools and applied to broader market conditions.
With this blog, we will learn about piercing pattern candlestick meaning, how it works, and how you can use it to make smart trading decisions. 

Piercing Pattern Candlestick Meaning

This pattern is a bullish candlestick reversal pattern and it is commonly observed in financial markets when there is a downtrend. There are two candles in this pattern: the first one is a bearish candle with a long real body which indicates selling pressure whereas the second one is a bullish candle that opens below the low of the first candle and closes above or above its midpoint. This indicates a change in sentiment as more buyers emerge than sellers. Traders usually await confirmation from subsequent price movement before using this pattern to make trading choices, but it hints at a shift from a bearish to a bullish trend. 

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Table of Content

  1. Piercing Pattern Candlestick Meaning
  2. Piercing Pattern Example
  3. How to Identify the Piercing Candlestick Pattern
  4. How does the Piercing Pattern work?
  5. Piercing Pattern Pros and Cons
  6. How to trade Piercing Pattern Candlestick?
  7. Strategies to trade the Piercing Candlestick Pattern

Piercing Pattern Example

Here’s an example of a piercing pattern in a candlestick: 

Consider a situation where you are examining a stock chart during a downtrend. On day 1, you notice a bearish candlestick with a long body which suggests major selling pressure. Based on this candle the downtrend appears to be still in its place. 

On day 2, the market opens considerably lower which again continues the bearish sentiment. However, as the trading session progresses, more buyers enter the market which results in a price rise. So at the end of the day, we can see a bullish candlestick with a long true body when the second candlestick closes above the first candle's midpoint or higher. 

This is known as the Piercing Pattern and it indicates an upward movement from the previous downward movement. By the end of the second trading day, this pattern shows that buyers have an upper hand over sellers' pressure, and it suggests a potential change in the market's sentiment in favour of bullishness. 

How to Identify the Piercing Candlestick Pattern

To identify the piercing candlestick pattern you need to examine the features of two consecutive candlesticks on a price chart. Here are the detailed steps on how to identify the piercing line candlestick pattern:

1. The Piercing Pattern in candlestick mostly shows up when the market is in a downward trend. To identify a downward trend, you need to look for a string of bearish candlesticks.

2. A bearish piercing candlestick pattern is the start of this pattern and the long real body indicates the strong selling pressure of this candlestick. 

3. The second candlestick is visible where the reversal indication appears. It starts bearish, opening below the previous candlestick's low. The lower opening of this candlestick shows the negative aspects that affected the market during the previous trading session.

4. In the bullish piercing candlestick pattern we can see the price starts to rise despite the lower opening this suggests that the bull gets aggressive.

5. The important part of the piercing pattern is the closing price of the second candlestick. At the end of the trading session, we can see the second candlestick close above the true body of the preceding candle. This suggests that the earlier bearish sentiment has given way to bullish momentum.

How does the Piercing Pattern work?

The Piercing Pattern ‌works during an economic downturn, when there is a sense of selling pressure and falling prices. At the start of the pattern, the downtrend is still going and the candle shows a lengthy actual body which signifies selling activities. 

At the start of the trading session, we can see that the sellers are still in charge when the second candlestick opens below the previous candle's low. Buyers begin to enter the market as the session goes on causing the prices to rise.  

It's important to note that the second candle closes above the middle or higher than the actual body of the first candle. The closing price reflects bullish momentum exceeding adverse emotion, which may indicate a shift in market mood from bearish to bullish.

At the end of the trading session we can see the Piercing Pattern indicates that the buyers have got more active and are dominating the sellers. In this pattern, traders ‌use the stop-loss orders below the first candlestick's low to control risk. This reduces the losses if the reversal is not realised.

Piercing Pattern Pros and Cons

Here are the pros and cons of Piercing Pattern:

Pros: 

  • This pattern, which is well known for being bullish, suggests that the market may be changing from being bearish to bullish.
  • The pattern on price charts is relatively simple to identify with just two unique candlesticks.
  • Trading decisions made based on the Piercing Pattern are frequently made by traders to clearly define risk-reward ratios. The possibility of a bullish trend reversal presents an attractive opportunity for profit, and stop-loss orders placed below the first candlestick's low can help reduce risk.

Cons:

  • As with many technical patterns, the Piercing Pattern is not perfect and can occasionally generate false positives. 
  • Depending on the state of the market, the Piercing Pattern's efficacy can change. The pattern could be less dependable on low liquidity or strong market trends, which raises the possibility of false warnings.
  • Subjectivity is involved in the interpretation of candlestick patterns, particularly the Piercing Pattern. Trading decisions may become inconsistent because of traders' varying views of whether a pattern satisfies all requirements for a legitimate signal.

How to trade Piercing Pattern Candlestick?

In the first step to trade the piercing pattern candlestick, you need to identify a downtrend on your price chart. This can be done by looking for a large bearish candle that is followed by a bullish candle that opens lower but closes above the midpoint of the first candle. You can confirm the signal by 

looking for other bullish signs, then immediately enter the trade or after further confirmation. 

You need to then set your stop-loss just below the first candle's low and decide on the profit you want to take. Track the trade's progress by adjusting your stop-loss and then you can exit according to your plan or if the trade shows signs of reversal. Review your performance afterwards to learn and improve.

Strategies to trade the Piercing Candlestick Pattern

Here are some strategies to trade the piercing candlestick pattern:
 

  • Strategy 1: Pullbacks on Charts

    Look for a piercing pattern when the uptrend is reversing. It often signals the end of the pullback and a potential to move upward when the pattern appears after a decline.
  • Strategy 2: Trading with Support Levels

    Watch for a price drop to reach these levels by looking for support levels on your charts. If a Piercing pattern appears close to a support level, you might want to go long when the pattern's peak exceeds its peak.
  • Strategy 3: RSI Divergences

    You can look for bullish RSI divergences in a downtrend, where the price makes lower lows but the RSI makes higher lows. When this strategy comes along with Piercing pattern candlestick, it forms a price lower low and considers entering a long position.
  • Strategy 4: Fibonacci Retracement

    You can use the Fibonacci retracement levels to find the reversal zones. You can consider going long when the price reaches a Fibonacci level and forms a piercing pattern.
  • Strategy 5: Use of Moving Averages

    During an upswing, look for price pullbacks to the moving average. When the price breaks above the pattern's peak, you might want to consider going long if a Piercing pattern forms close to the moving average.

Conclusion
The piercing line candlestick pattern provides valuable insight into the continuation of bullish momentum.  However, using only this pattern may not result in consistently profitable trades, although it's useful to alert traders about the potential trend reversals. Its effectiveness is enhanced by including the Piercing Pattern in a comprehensive trading strategy along with other confirmation indicators. Traders can gain a strategic advantage by analysing volume, price action, and momentum in conjunction with the Piercing Pattern and identifying potential market turns ahead of the general market sentiment. Finally, you need to choose a reliable online trading app that can enhance your decision-making processes and risk management practices.

FAQs on piercing pattern candlestick

The Dark Cloud Cover pattern is the opposite of the piercing pattern. 

It is a candlestick pattern which signals a potential bullish reversal during downtrends by a bullish candle that is closing above the midpoint of the former bearish candle.

The piercing pattern is most effective while indicating the potential bullish reversals during downtrends in the financial markets.

In a Piercing Pattern trade, the target price is typically determined by factors such as previous resistance levels and Fibonacci extensions.

The piercing line indicates a potential reverse of the bearish-bullish trend. Therefore, it would be wise to transition to a new long position from your current one. 

You should always verify a bullish reversal signal from the Piercing Pattern with other trading indicators or price action. It is not perfect, like any chart pattern, and under some market circumstances, it could give wrong signals.

The Piercing Pattern can be traded using a variety of strategies, including moving averages, RSI divergences, applying Fibonacci retracement levels, trading at support levels, trading on pullbacks within an uptrend, and trading on pivot points.

To protect profits and limit losses, you can use the stop-loss orders below the low of the pattern's first candlestick, establish take-profit goals based on risk-reward ratios, and modify stop-loss orders as the trade moves forward.

Yes, to enhance the usefulness of the Piercing Pattern you can combine it with other candlestick patterns or technical analysis methods.