Piercing Line Candlestick Pattern: Meaning, Formation and Advantages

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. For educational purposes, we have annotated our overview example to show how a trading strategy might work for this bullish piercing line candlestick formation. All prerequisites are present – strong downtrend, pricing gap and a green candle closing above the 50% line, the ‘piercing line’, and an indication that market sentiment has shifted. We have also added the stochastics oscillator, which is confirming a shift in oversold conditions. A piercing pattern is a two-day, candlestick price pattern that marks a potential short-term reversal from a downward trend to an upward trend.

• We would agree that it is better to trade in the direction of the primary trend.
• A breakout to the upside from a chart pattern, for example, might imply that the price will begin to move higher.
• We take a variation of the engulfing pattern entry-level but tweak it slightly.
• This pattern indicates a potential reversal in the downward trend, as the bulls can take control and push prices up.
• The bullish piercing line formation is not perfect, but it does provide a moderately high reversal signal, especially when combined with other technical tools and an assessment of market conditions.

To maximize the chances of success, traders should set their stop loss at the low of the previous bearish candle. This Pattern is more suitable for day and swing traders as it works best in shorter time frames. So, in the image above you can see a very clear example of this pattern occurring on the charts.

Piercing Pattern Candlestick on SPX

Suppose a bullish piercing line pattern forms in an uptrend-sloping moving averages; you can take an appropriate position. These patterns’ reliability might increase if the conviction from one more indicator can be drawn. Instead, many traders use other technical analysis tools to confirm the pattern. In addition, they enter a position only when a third candle closes above the second bullish candle, and confirms a trend reversal. The chart is courtesy of eToro, and we have added a few annotations to illustrate the component parts of the bullish piercing line pattern. The green circle contains the required companion pair of candlesticks.

The ultimate purpose of price movement analysis is to determine the price direction. Identifying the price direction, on the other hand, involves extensive investigation and several confirmations using trading techniques such as candlesticks, price patterns, and trend detection. This piercing line pattern consists of two downtrend candles(red and green). The first candle is a red (or black) body and the second candle is a green (or white) body.

What is a bull market?

The chart patterns shown here reminds me of a simple ABC correction. Price moves in an uptrend then reverses to a down-up-down jog that is the
ABC. So previously we have seen a bearish pattern – The Dark Cloud Cover. So, looking at the image above you can see a great example of this system in play. The rejection of the gap down by the bulls typically can be viewed as a bullish sign. The fact that bulls were able to press further up into the losses of the previous day adds even more bullish sentiment.

HowToTrade.com takes no responsibility for loss incurred as a result of the content provided inside our Trading Room. By signing up as a member you acknowledge that we are not providing financial advice and that you are making the decision on the trades you place in the markets. We have no knowledge of the level of money you are trading with or the level of risk you are taking with each trade. 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 candlestick pattern is likely named piercing because of the way the white candle’s close “pierces” through the midpoint of the previous black candle.

How to recognize a Piercing Patterns?

So, in terms of how we would trade this pattern, we can set a buy order as price breaks above the high of the bullish candle and our stop goes below the low of that entry candle. From there we then look to target a minimum of twice our risk to ensure positive risk-reward. Continuation patterns indicate that the current trend has a greater probability of continuing rather than the trend being reversed. Continuation patterns generally form in an existing trend when the price action enters a fairly brief period of consolidation.

During this consolidation phase, the trend appears to weaken as profit taking takes place. However, the continuation of the preceding trend is more probable once the consolidation has completed. During the formation of this pattern, initially, there is certain indecisiveness at support levels. Later, the situation reverses, and the bulls or the buyers gain control and push bears out of the scene. Finally, false positives are common with this pattern, meaning that often it will signal a reversal when none is present.

What is Piercing Pattern?

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. It signifies that the bulls could not entirely reverse their losses from the previous day. When additional technical indicators, such as RSI, Stochastic, or MACD, indicate a positive divergence while creating a piercing line pattern, the upward trend is more likely to continue. A breakaway gap is a pattern that occurs in the first phase of a reversal. It is identified by two consecutive white candlesticks with a second-day white candlestick that shows a substantial gap higher from the first day’s closing price to the second day’s opening price.

As a result, the closing price at the end of the day surpasses the median point of the previous bearish candle, indicating a shift in market direction. The positioning of a candlestick formation on the graph is of utmost importance. Certain patterns are effective in trending markets, while others are better suited for sideways markets. To increase the chances of success, it’s https://forexhero.info/mathematical-modules-in-python/ wise to supplement your approach with additional indicators. So, you can see that as our piercing line pattern has formed, the stochastics indicator is giving us a bullish signal. The indicator was moving lower as price was moving lower, then at the point that the pattern occurs, the stochastics indicator crossed below the lower threshold and then crossed back above.