Piercing Pattern
Rule Book for the Candlestick Pattern
"Piercing Pattern" for New Traders
The Piercing Pattern is a bullish reversal
pattern often found at the bottom of a
downtrend. It indicates potential for a price
reversal, signaling that sellers may be losing
control and buyers are stepping in. Here’s a
structured guide to understanding and
identifying the Piercing Pattern:
1. What is a Piercing Pattern?
The Piercing Pattern is a bullish reversal
pattern.
It appears in a downtrend and is
characterized by two candlesticks:
o The first candlestick is a long black
(red) real body, representing a bearish
day.
o The second candlestick is a long white
(green) real body that opens lower
than the previous day's low and closes
well within the prior black
candlestick’s body.
2. Formation and Key Characteristics
Downtrend Presence: The pattern needs a
prior downtrend to signal a potential
reversal.
First Day: A bearish black candlestick with
a long real body.
Second Day:
o Opens below the low of the first day,
creating a gap down.
o Closes above the midpoint of the
previous day's black candlestick,
showing significant buying pressure.
Penetration Level: The deeper the white
candlestick closes into the black real body,
the stronger the reversal signal. Ideally, it
should cover more than 50% of the
previous day's body.
3. Psychology Behind the Pattern
Bearish Sentiment: The initial black
candlestick reflects ongoing bearish
sentiment.
Market Surprise: The next day's gap down
opens lower, reinforcing the bearish view.
However, this is where a shift occurs.
Buyer Strength: Buyers step in strongly,
pushing the price higher, and the white
candlestick closes above the mid-point of
the black candlestick.
Bear Uncertainty: Bears may begin to
doubt the downtrend’s strength, while
bulls take it as an opportunity to enter.
4. Comparison to Related Patterns
Bullish Engulfing Pattern: Similar, but the
white candlestick in an engulfing pattern
completely covers the prior black
candlestick.
On-Neck, In-Neck, Thrusting Patterns
(Bearish Variations):
o On-Neck: White candlestick closes
near the prior low, weak reversal
indication.
o In-Neck: White candlestick closes
slightly into the previous body, still
weak.
o Thrusting: Closes close to the prior
black body’s midpoint but remains
bearish in a downtrend.
Piercing Pattern is stronger than these
variations as it penetrates deeper into the
black candlestick, signifying a potential
bottom.
5. Key Points for Identifying a Strong
Piercing Pattern
Downtrend: The pattern must occur
during a downtrend.
White Body Penetration: The second-day
white candlestick should ideally penetrate
more than halfway into the black body.
Volume Confirmation: Higher-than-
average volume on the white candlestick
day can strengthen the signal.
No Flexibility: Unlike some patterns where
rules are lenient, the piercing pattern’s
white candlestick must penetrate over
halfway to confirm a reversal signal.
6. Trading Strategy Using Piercing Pattern
Entry Point: Consider entering a long
(buy) position if the white candlestick’s
close is significantly above the black
candlestick’s midpoint.
Stop Loss: Place a stop loss just below the
low of the piercing pattern for risk
management.
Exit Strategy: Set profit targets based on
nearby resistance levels or trailing stops to
secure gains if the trend reverses.
8. Key Takeaways
The Piercing Pattern provides a reliable
signal of bullish reversal in downtrends.
Penetration depth into the prior black
candlestick is crucial; ideally, over halfway.
Volume support, a deep white candlestick,
and a prior downtrend all reinforce the
pattern’s strength.
Use the Piercing Pattern in combination
with other indicators or chart patterns for
more accurate analysis.
