Piercing Line Candlestick Pattern

The next candlestick pattern that we will learn is a Piercing Line pattern which is a bullish reversal pattern that can be found at the end of a downtrend.

What is a Piercing Line Candlestick Pattern?

This candlestick pattern is used as an indicator to enter a long position or exit the sell position. Piercing pattern is formed when the bulls and bears, both are fighting to gain control over the prices. The piercing pattern is made up of two candlesticks. The first candlestick should be a red candlestick having a large real body, which indicates continuation of the prior trend. The second candlestick should be green in color and also should be below the low of the previous candlestick. The second candlestick must close above the middle of the real body of the first candlestick. 

What is the psychology behind the pattern?

As the current trend is down, the prices keep making lower lows. On the first day of this pattern formation, as per the expectations, the prices move lower, forming a bearish candle. On the next day, the price opens below the prior day’s closing price. There is sudden buying pressure from the bulls which moves the prices up.

However, the bulls keep buying, and at day’s end, the price closes above the opening price. This indicates that the bulls are back in the market. The real body of candle 2, should cover the real body of the 1st candle at least by 50 % from below.  

Confirmation

The confirmation of the reversal signal is given by the bullish candle on the next session after the formation of this pattern. The third candle should be a bullish green candle. On the break of 1st candles high, a long trade can be initiated. Stop-loss can be placed at the low of the Day 2 candlestick. However as mentioned earlier, a trader must keep in mind other technical parameters to initiate the trade.