What is a Piercing Line Candlestick: Its formation & how it works?

Key Highlights

• The Piercing Line Candlestick Pattern is a bullish short-term reversal pattern commonly used in trading.
• It consists of two consecutive candles, where the first shows a significant drop due to sellers dominating, and the second reflects strong buying interest.
• It indicates a potential upward trend.
• It should close near the first day's opening.
• Confirmation with other indicators like RSI, Stochastic, or MACD, along with higher trading volumes, enhances the pattern's reliability.

How a Piercing Pattern Works?

A piercing pattern consists of two days: the first is largely affected by sellers, while the second is reacted to by eager purchasers. This could suggest that the quantity of shares that market players are willing to sell has considerably decreased and that the price has dropped to a point where there is a clear and growing demand for purchasing shares. This dynamic appears to be a somewhat trustworthy predictor of an upward short-term trend.

Piercing Line Candlestick Pattern Formation

Over the course of two days, the piercing line candlestick pattern is developed, with buyers dominating the second stick and sellers influencing the first. It indicates a trend's reversal and a potential short-term uptrend. A more widespread downward price trend usually precedes the piercing line candle pattern. It indicates that the maximum amount of shares available for sale has been reached, and when purchasers begin to control the market, the price of the shares will progressively rise.

Two consecutive candles create the piercing line candlestick pattern. With an average or wider trading range, the first candle opens close to the high and ends close to the low. The first candle is red because it represents a downward progression. A green candle follows the red one, but there are some subtle clues to be aware of.

The second candle in a piercing line candle design opens with a gap. Only in stocks is it possible for a gap to form because a day's opening price might move up or down from the day before. A bullish piercing line candlestick pattern's second candle opens with a gap, indicating that the opening price is less than the day's closing price. The second stick, though, ought to close close to the first day's opening price. For a distinct piercing line pattern, the second green candle needs to cover at least half of the red candle from the previous day.

How to trade Piercing Pattern Candlestick?

The bullish candlestick pattern with piercing lines indicates a potential trend reversal. But it might not be enough to simply rely on the piercing line pattern to indicate a buy. A buy signal must be confirmed by the pattern in conjunction with other indicators. To create a piercing line pattern, the second candle just needs to cover half of the first candle. It is not necessary to completely cover the red candle. It indicates that the gains made on the first day could not be fully recovered by the bulls. There is a greater chance that the upward trend will continue when additional technical indicators such as the RSI, Stochastic, or MACD exhibit a bullish divergence concurrently with the creation of a piercing line pattern.

An additional straightforward yet crucial factor to be considered is the trading volumes. A higher indication of the probable halt to the declining trend is provided if the volume on the second day is higher than usual.

Conclusion

For a price reversal, the piercing line candle pattern is an essential indicator. It is frequently observed in areas of congestion where the ranges of both lines are short. If piercing lines appear in an area where congestion is present, do not trade based on them. Only trade piercing line patterns that are plainly visible on the charts.