What Is A Piercing Line Pattern? We Explain How To Read Its Signals

The pattern must be seen in conjunction with other indicators that indicate a buy signal. To make a piercing line pattern, the second candle must cover only half of the first candle. Thus, a piercing pattern can be further confirmed if it occurs at the support trendline of a price channel, where buying has previously come into play. A piercing pattern is typically only a potential signal for reversal so following a piercing pattern a trader would want to watch for a breakaway gap. When the open and close are dowmarkets at the high and the low, or vice versa, then the candlestick will have no shadow above or below the real body.

First, we drew Fibonacci retracements from the highest level to the lowest of the previous trend, which is also the lowest level of the second bullish candle in the piercing line candle formation. In such a scenario, the stop loss is placed below the lowest level of the second bullish candle. The reason why I like the Fibonacci tool is that I know I’m not the only one who is using it. That’s the magic of Fibonacci retracement levels – many traders worldwide watch these levels, and if you join them – well, you can take advantage of using Fibonacci support and resistance levels.

How to Use the Piercing Line Pattern in Trading

1. Once you install the platform, you will automatically get the free START plan, which includes cryptocurrency trading and basic features.
2. Trading the Piercing Line pattern involves making decisions against the prevailing trend, which carries higher risks.
3. ATAS enables you to load tick-by-tick data from cryptocurrency, stock, and futures markets, providing a comprehensive basis for analyzing price and volume interactions.
4. A piercing candlestick is a pattern used to spot possible price changes in the stock markets.
5. The Piercing Pattern is viewed as a bullish candlestick reversal pattern, similar to the Bullish Engulfing Pattern.
6. To help you with that, below we will show you two basic trading strategies to use when identifying the piercing line two-candlestick pattern.

The fact that bulls were able to press further up into the losses of the previous day adds even more bullish sentiment. This pattern offers an opportunity to enter a position at an early stage of a possible upward trend. (2) A bullish candle that dips below the previous low but closes slightly above the midpoint of the prior candle. In his “Encyclopedia of Candlestick Chart,” the Piercing Line ranks 21st out of 103 patterns, with 1 being the highest rating. In practice, it works as a bullish reversal and is confirmed in 64% of cases. But first, let’s run through a short primer on the Piercing Line candlestick pattern.

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It is a bullish reversal pattern that forms when the opening price is lower than the close of the previous candlestick, but the close of the current candlestick is higher than its opening. A piercing pattern on a candlestick chart indicates that a price downturn may be due for a reversal. As with other technical indicators, they are not perfect predictors of price action, and traders should assess a wide variety of indicators and market conditions when making an investment. The first candlestick is usually dark colored or red, signifying a down day, and the second is green or lighter colored, signifying a day that closes higher than it opened. The Piercing Line pattern is a bullish trend reversal pattern that indicates that there is weakness in the current downtrend, with the implication that the downtrend may be coming to an end.

Various markets, such as forex, stocks and commodities may find the piercing pattern effective. To help you with that, below we will show you two basic trading strategies to use when identifying the piercing line two-candlestick pattern. While there are many pros to using a piercing line pattern when trading, it is important to remember that no single indicator is perfect. It is always best to use multiple indicators in conjunction with one another to make the most informed trading decisions possible. Out of all the patterns that technical analysis uses to try and understand markets, the Piercing pattern is one of the more successful. In early August 2024, stock markets were pressured by recession fears, fueled by weak U.S. labor market data.

These patterns allow you to enter early in the establishment of the new trend and usually result in very profitable trades. The Piercing Line candlestick pattern is viewed as a bullish reversal pattern. Like many other trend reversal indicators, the piercing line is a lagging indicator and, therefore, should not be traded in isolation. And, because chart candlestick patterns tend to repeat themselves time after time, using the appropriate technical indicators could help you increase the chances of success.

Is a Piercing Line pattern bullish or bearish?

Alternatively, if an uptrend and a red candle Engulf a green candle, this would be considered a bearish reversal signal. There are many ways to trade engulfing patterns, but the most important thing is to ensure that you are using them in context with the overall market trends. This consists of an upward trend, ending with a strong green candle, a gap up, and then a red candle indicating that the number of sellers outnumbers the buyers. A piercing pattern is one of a few important candlestick patterns that technical analysts typically spot on a price series chart.

Technical traders examine a variety of indicators, such as moving averages, sentiment indicators, and stochastics, to predict when an asset may experience a retracement or reversal. Due to the unpredictable nature of market swings there is no certain way to predict if an asset is due for a reversal. This candlestick pattern is uncommon in the market, which may limit its practical application.

Traders finally take profits at a predetermined level, such as a resistance level or a Fibonacci retracement level. These tactics can help traders leverage the piercing candlestick pattern to potentially profit from market bullish reversals. The piercing line pattern psychologically represents a change in market mood from negative to bullish. A big drop in price and negative feelings are shown by the first day’s long red candle. Yet, the second day’s gap down offers optimistic traders a chance to enter the market at a discount. The positive sentiment intensifies as the price rises over the second day, and the closure above the midpoint of the actual body of the first day implies that buyers have taken control of the market.

It is a double candlestick pattern that warns of a possible bullish trend reversal, making it a bottom reversal pattern that appears towards the end of a downtrend. The Piercing Line pattern is the opposite kraken trading review of the bearish Dark Cloud Cover pattern that appears in an uptrend. As the Piercing Line pattern is a bullish trend reversal pattern, it must appear in an existing down trend for pattern to be of any significance. Different market conditions significantly vary the reliability of the piercing pattern. It exhibits more dependability in stable or trending markets; however, its reliability may wane in highly volatile environments due to rapid price swings that can induce false signals. It’s most effective when confirmed with other technical indicators and market analysis techniques.

Traders would, therefore, look to go long (buy) once the Piercing Line formation has completed. An aggressive trader would take a long position on the open of the following candlestick with a protective stop order placed just below the low of the Piercing Line pattern. Traders that are holding open short positions would also want to exit their short positions at this stage as holding on to short positions for longer would be risky. Reversal patterns mark the turning point of an existing trend and are good indicators for taking profit or reversing your position. Generally, trend reversal patterns indicate that a support level in a downtrend or a resistance level in an uptrend will hold and that the pre-existing trend will start to reverse.

They should then think about the bigger picture of the market and search for additional signs or patterns that back up the bullish bias suggested by the Piercing Line pattern. Traders should control risk by placing stop-loss orders and analysing the trade’s risk-to-reward ratio. The trader may think about opening a long position if the Piercing Line pattern is verified and the market environment supports it. It is very important to keep a close eye on the price movement and be ready to close the position if the market turns against the trader after the trade has been placed. Traders can potentially profit while managing risk by using the Piercing line pattern by taking these actions.