Piercing Candlestick Pattern

The piercing line candlestick pattern is a reversal pattern that is found in a down trending instrument.

It is a 2 candle bullish pattern that is best used with other forms of technical analysis.

Like all bullish reversal candlestick pattern, using a support zone to trade against is good practice.

Upon seeing a piercing line candlestick pattern in a downtrend, traders may look for a reversal or consider covering any short positions.

What Are The Characteristics of The Piercing Line Pattern?

As mentioned, we are looking at 2 candles that form the bullish reversal pattern in a downtrend.

The first candle must close bearish (red or black) and having a large real body candle compared to surrounding candles, heightens the effect.

The second candlestick must:

• Open lower than the first candlestick (gaps) on the next day or period
• Price must close at least 50% up the real body of the bearish candlestick

If the second candle continues up and take up the entire body, we now have a bullish engulfing pattern.

The deeper into the real body day two goes, the stronger the potential of a reversal.

This is an easy chart pattern to spot and as always, we trade the meaning behind the pattern, not the pattern itself.

How The Piercing Pattern Works

During a strong down trend, sellers are happy with the progress of their trade.

When the strong black or red candle forms for day one, sellers are content with the results of their trade.  A strong close, to them, is confirmation that further downside is a strong possibility.

On day 2, price gaps down below the candle of day 1.  Bears are happy to see the gap down in price.

When price begins to rally, it first takes out the low of the previous day and begins to climb.

Price passes the previous closing price and sellers who were once confident, begin to see profits evaporate.

Buyers on the sidelines can see the green candle of day 2 begin to grow as the day moves on.  Some traders have already entered long once we get day two turning from black to green.

There is no magic with the 50% rule and is psychological in nature.  Price has taken back half of the previous day and demoralized shorts, especially at the end of the session, exit their trades.

Bottom line, think of the concept:

• Day 1 closes strong bearish.
• Day 2 opens with a gap down
• Day 2 closes at least 50% up the candle of day 1 but DOES NOT engulf the entire body

That is all you need to know to find this pattern.

Piercing Pattern – Potential Buy Signal

Now that we can find the pattern on the chart, how do you trade it?

1. As a bullish reversal pattern, you need the instrument to be in a downtrend
2. The first candle should be a strong bearish candle – large body and minimal lower and upper shadows
3. The second candle’s opening price must be lower than the low of day one (yes, it can open lower than the previous close but not the low)
4. Day 2 candle must close at least 50% of the previous candlestick but not engulf it
5. Buy stop above the second candle for a long position
6. Protective stop loss below the low of the pattern

While all those are important, so is the location where you find this pattern.  We want to find a support zone on the chart and locate the pattern there.

Daily stock chart of NTSE.  Price is in a downtrend and has come into a former zone of resistance.

1. Not ideal but forming after a gap down and closing with a minimal lower shadow is important (remember, concepts)
2. Price gaps lower and roars back closing just under the previous candle’s open price

The gap up left no doubt that sellers were done.

You don’t need a ton of examples to understand the general use of this reversal pattern.

There is another interesting way to use these types of candlestick patterns and is one I personally use.

Piercing Pattern – Entry Trigger

A tried and true trading technique is trading reversals out of pullbacks. I do not trade candlesticks in isolation as a complete system.

I use these patterns as entry triggers out of standard technical patterns – trading ranges and pullbacks.

Let’s break down this chart of DraftKings (DKNG).

Price action shows us this is in a downtrend and is easily seen with lower highs and lows.

We see a rally off the lows that is larger than the ones that came previously.  This is a change of character in this stock.

While you would not yet know at “A”, we then work into an ABCD correction off that large rally.  At “D”. price has came into a mess of support to the left.  Almost to the dollar, we see that A-B = C-D which is a complex correction.

Zooming into the lows, you can see our piercing line candlestick pattern is complete and price heads up.  This complex correction and pattern marked the bottom of a downtrend.

The buy point is marked in green (above the high of the pattern) and the protective stop is in red (below the low of the pattern).

Big ES Turning Point

The piercing pattern also gave a strong reversal signal off the weekly chart of the ES.

While not officially a down trend, a 35% drop in price on big volume is clearly bearish.

The last red bearish candle made it very clear that sellers were in charge especially with a small lower shadow.

In charge that is, until the next week when the bullish piercing pattern stepped in with a strong bullish candle, and began the price movement to highs.

Key Takeaways

This is a simple but powerful bullish signal when found in the right context.

• The pattern has two candlesticks – the first is a strong bearish candle and the second is a strong bullish candle
• The second candle’s price opens below the close of the first candle
• The second candlesticks must close at least 50% up the body of the first day
• Look for the pattern during a downtrend at a support level or as an entry trigger in pullbacks
• Stop loss goes below the pattern and the entry is a break of the high of the pattern

You could also include other technical indicators such as volatility bands or moving averages.

Chart patterns are not magic so understand the context of what you are actually trading.

Good luck and let me know how it goes.