Piercing Line Candlestick Pattern are an important tool of technical analysis to learn the price movement of securities .Among different types of candlestick patterns present, here we shall discuss the meaning, formation and trading strategies of the multiple candlestick pattern Piercing Line.

Pattern formation helps traders identify the trend of security with a view to entry and exit opportunities to build valuable trading strategies.

What is a Piercing Line Candlestick Pattern?

The Piercing Line candlestick pattern is a type of bullish reversal candlestick pattern used by traders to analyse the price movement of securities. A prior downtrend followed by a Piercing Line Pattern indicates a trend reversal towards an uptrend.

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The Piercing Line Pattern is a technical analysis tool consisting of 2 candles, a large bearish candle and a large bullish candle. The pattern formed at the bottom of a downtrend signifies that the downtrend is about to end and an upside reversal can be expected.

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Traders use this pattern to either exit a short position or enter a long position in the security. The inverse of a piercing line candlestick pattern is a Dark cloud cover candlestick pattern.

Formation of Piercing Line Candlestick Pattern

The piercing line candlestick pattern is formed by a combination of two candles with a strong prior downtrend. The two candles are:

  • Red Candle(First candle)
  • Green Candle(second candle)
  • Red Candle(First Candle):- The first red candle of a pattern formed is a comparatively large-bodied bearish candle that is part of a downtrend. 

The candle should close above the opening of the second candle which is a green candle.

  • Green Candle(second candle):- The second green candle of a pattern formed is a comparatively large-bodied bullish candle with a gap down open from the close of the first candle. 

The green candle should cover and close at least above half (50%) of the first red candle to form a valid piercing line pattern.

Piercing  Candlestick Pattern

The psychology behind the formation of a pattern with a downtrend signifies that the bears are in control over the price forming the first candle of the pattern to close lower.

The sudden buying pressure in the gap-down opening of the second candle pushes the price higher by covering half of the body of a previous candle, indicating bulls are back in the market with a strong upthrust to push the prices much higher.

How to trade a piercing line candlestick pattern?

Once the Piercing Line Candlestick Pattern is formed, traders can find entry/exit opportunities with a better view of trends in securities.

Entry:- When the piercing line pattern is formed at the end of a downtrend, an entry to the long position can be spotted. Entry is always preferred after the confirmation of the pattern, it can be set at the closing price of the next candle of the piercing line pattern formed.

Stop loss:- The stop loss to the position can be placed below the low of the piercing pattern. As a part of risk management, trading with stop loss and respecting the logical stop loss is important.

Profit target:- For the long position entered in a piercing line pattern, a target can be based on the risk-to-reward ratio or the levels of resistances in the market. Also, the profit targets can be set to the next resistance levels from the entry of the position.

Piercing line candlestick pattern

Chart of Nifty bank showing formation of valid piercing line candlestick pattern with entry and stop loss levels.

Key factors of piercing line candlestick Pattern

  • The prior trend should be a downtrend.
  • The first candle should be a large-bodied red candle.
  • The second candle should be a large-bodied green candle with gapdown open.
  • The two candles formed should be adjacent to each other.
  • The second candle of the pattern should cover at least half of the first candle body which validates the pattern.

Best time frame

  • In Piercing Line Candlestick Pattern, intraday traders are advised to follow 5-minute or 15-minute time frames for a better view of entry and exit points in security.
  • For swing and positional traders, daily or weekly charts are preferred for high-success rate trades with piercing line candlestick patterns.

Limitations of piercing line candlestick pattern

  • The pattern formation is valid with a prior downtrend only so the formation of a pattern with a prior uptrend is a failure of the pattern.
  • All the conditions of the pattern formation should be followed for valid entry and stop loss levels.
  • For a better view of entry or exit signals, the pattern is preferred to be combined with other technical tools.

In Closing

From the above learning, it is clear that the formation of a Piercing Line Candlestick Pattern signals a strong bullish reversal trend and traders can build enough strategies to enter a long position in a security.

Before spotting the pattern, traders need to follow the rules of a valid pattern formation and it is always preferred to enter a trade with confirmation of the pattern by combining with other technical tools like indicators, chart patterns and candlestick patterns. For profitable trades in the long run follow the learnings with good risk management of the positions.

Written By Deepak M

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