What Is a Piercing Pattern

What Is a Piercing Pattern?

• Piercing Pattern is a bullish reversal pattern that can be found at the end of a downtrend. This candlestick pattern is used as an indicator to enter a long position or exit the sell position. This type of pattern is formed when the bulls and bears both fight to gain control over the prices.
• The piercing pattern is made up of two candlesticks.  The first candlestick should be red candlestick having a large real body and the second candlestick should be green in colour and should be below the low of the previous candlestick.

How a Piercing Pattern Works

• A piercing  forms when a security opens at a lower price than its previous close and immediately rebounds to make an intraday high and then closes at or above its opening price. The purpose of creating an outside reversal signal is to exploit divergence between two oscillators. The piercing line candlestick pattern is just one of many reversal signals that fall in to that category.
• This pattern offers confirmation signals of reversals whenever the stock price has been pierced from below the opening price and closing price at a higher level than its opening price.  These patterns are not common and are rarely formed. 
• Therefore you should not be over reliant on this pattern. These patterns are rare and so they can give misleading signals. This is the reason why they are not popular among intraday traders. These patterns reliability might increase if the conviction from one more indicator can be drawn.

Piercing Pattern Formation

• The formation timeline of this pattern is two days. The first candle in this pattern is influenced or dominated by sellers, whereas buyers dominate the second candle.  The preceding candle of this pattern indicates a downward trend in the asset’s price.  Under this pattern, you can see that the supply of shares meant for selling has reached its upper ceiling. The second candle of this pattern starts with a small gap.
• Gaps can only be formed if a security’s opening price is higher or lower on the second day compared to the previous day’s closing price. The second candle crosses at a value nearer to the opening price of the first day. In order to have a clear piercing line pattern, the second green candle shall cover at least half of the last day’s red candlestick.

Piercing Pattern Example

• This is a daily chart of Sun Pharmaceuticals Industries Limited. The chart shows us that SUN was under a long bearish trend. At the end of the bearish trend, there is a large red bearish candlestick followed by a large green candle.
• Let us consider that the red candle is P1 and the green candle is P2. The P2 candle started with a gap down open and then went further below, showing the strength of the bears still active in the trade. The P2 candle closed above the midpoint of the P1 candle. This move started the bullish reversal trend. After P2, the bullish trend continued.
• A trader will enter the stock on the third day above the closing price of P2. The stop loss would be just below the low of P1. When the uptrend starts, the trader can continue to hold the stock bought on day three, till the stop loss is triggered. Or continue holding the stock with a trailing stop loss. Else the trader remains on the stock till another downtrend occurs.

How to use Piercing Pattern?

• The piercing line pattern signals an overall bullish reversal trend in markets or related stocks. However the trader should be very cautious while using them for trading as it can give misleading signals. In piercing pattern the trader can visually see the second candle covers about half of the first candle for forming a piercing shape.
• The red candle may not get covered in its entirety, implying that the bulls could not control the market completely and reverse complete losses of the first day.

Ideal Trading setup for Piercing Pattern

•  When the trader observes a piercing candlestick chart pattern he should wait until the high of the first candlestick is succeed by the previous bearish candle.  This is an ideal trade setup when trading with the piercing candlestick pattern. 
• The stop loss should low of the previous bearish candle. Piercing pattern is more suitable for day and swing traders as the rate of success are quite high in longer time frames.

Conclusion

Thus piercing pattern is made of two candlesticks the first one is bearish and the second one is bullish candlestick. Piercing Pattern is a bullish reversal pattern that can be found at the end of a downtrend.  It is found towards the end of  a downtrend and is quite similar to the dark cloud ever. Investors must look at a few characteristics when they trade with this pattern and not forget to confirm the signals given by this pattern with other technical indicators.