What is a Piercing Line Candlestick Pattern?

Piercing Line Candlestick Pattern is an important tool in technical analysis to determine price movements of securities. Among the different types of candlestick patterns that exist, here we will discuss the meaning, formation, and trading strategies of multiple candlestick pattern piercing lines.

Pattern formation helps traders identify security trends by considering 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 analyze price movements in securities. A previous downtrend followed by a piercing line pattern indicates a trend reversal to an uptrend.

The Piercing Line pattern is a technical analysis tool that consists of two candles, a large bearish candle and a large bullish candle. A pattern formed at the bottom of a downtrend means that the downtrend is about to end and a bullish reversal is expected.

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

Formation of a piercing line candlestick pattern

The piercing line candlestick pattern is formed by the combination of two candles that previously showed a strong downtrend.

The two candles are as follows:

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

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

• Green Candle (Second Candlestick):- The second green candle of the formed pattern is a relatively large bullish candle with an open gap from the closing price of the first candle.

To form a valid piercing line pattern, the green candle must cover and close at least half (50%) of the first red candle.

The psychology behind the formation of a bearish pattern means that the bears are controlling the price forming the first candle of the pattern which closes downwards.

At the opening of the second candle gap down, sudden buying pressure pushes the price higher, covering half of the body of the previous candle. This indicates that the bulls are back in the market with a strong bullish trend pushing prices even higher.

How to trade the piercing line candlestick pattern?

Once a piercing line candlestick pattern is formed, traders can better identify security trends and find entry/exit opportunities.

entry:- When a through line pattern is formed at the end of a downtrend, you can confirm the entry of a buy position. Entry is always given priority after pattern confirmation, and can be set to the closing price of the next candle of the formed piercing line pattern.

Stop Loss:- A stop loss for that location can be placed below the low of the piercing pattern. As part of risk management, it is important to trade with stop losses and respect logical stop losses.

Profit Target:- For long positions entered with a piercing line pattern, the target may be based on the risk-to-reward ratio or the level of resistance in the market. Additionally, the profit target can be set at the next resistance level after entering the position.

Nifty bank chart showing the formation of a valid piercing line candlestick pattern along with entry and stop loss levels.

Key Elements of the Piercing Line Candlestick Pattern

• The previous trend should be a downward trend.

• The first candle should be a red candle with a large body.
• The second candle should be a large green candle with an open gap down.
• The two candles formed should be adjacent to each other.
• The second candle in the pattern must cover at least half of the first candle that validates the pattern.

optimal time zone

• In a piercing line candlestick pattern, intraday traders are advised to follow a 5-minute or 15-minute time frame to better see the entry and exit points of the security.
• For swing and position traders, daily or weekly charts are preferred for high success rate trading with piercing line candlestick patterns.

Limitations of the Piercing Line Candlestick Pattern

• A pattern formation is only valid in a previous downtrend, so forming a pattern in a previous uptrend is a pattern failure.
• All conditions of the pattern formation must be followed for valid entry and stop loss levels.
• Consider combining patterns with other technology tools to better see entry and exit signals.

Finishing

From the above learning, it is clear that the formation of a piercing line candlestick pattern indicates a strong bullish reversal trend and traders can strategize well to enter a long position in the security.

Before discovering a pattern, traders must follow valid pattern formation rules and it is always preferable to combine other technical tools such as indicators, chart patterns and candlestick patterns to confirm the pattern and initiate trades. Follow your learnings along with proper risk management of your positions for long-term profitable trading.

Written by Aaron Barth

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