What are Piercing Candlestick Pattern?
Piercing Pattern is a reversal candlestick pattern which is bullish in nature and appears at the end of a down trend. It is a complex pattern made of two candlelines. The first candle is bearish in nature and the second is bullish in nature.
It has its name because the prices pierces up through the falling market. It is one of the important pattern, which you should give attention to.
Piercing pattern is formed by the combination of two candlesticks. The first one is a falling black candle and the second is the reversal white candlestick.
The market is in a down trend. The price opens at almost high of the day and as usual the sellers continue to sell. At the end of the session the price closes almost at the bottom for the time period. This results in the formation of bearish black candle, which is the first candle of the piercing candlestick pattern.
On the next day or next time period the price opens below the low of the previous bearish candlestick. Sellers are making new short trades. Those who are already short in the market are also adding to their position. But the smart money creeps in starts accumulating shares from these ignorant sellers. As the demand increases the momentum decreases and the prices starts rising. As the prices rises the bears are happy to sell more at a higher price. This facilitates bulls to accumulate more shares at lower price.
The demand continues to increase more than the supply, pushing the price up. As the new short sellers are all in loss, they also start to buy back to minimize their losses. Sensing the change in the trend, the old bears starts booking profits in their short positions. As the bulls continue to increase their long position, the price rise further and at the end of the session the price closes above the opening. This results in the formation of bullish white candle, which is the second candle of the piercing pattern.
The piercing pattern signal becomes valid if the close has penetrated well in to the previous black candle's real body.
It is obvious that the buyers are taking over the control of the market. It signifies that the bottom reversal of the down trend is unveiling.
More the penetration of the second day's close into the range of the previous day's black real body, more is the bullishness of the market. Some chartists insist that the penetration of second day's close should be at least 50% into the range of the previous day's black real body.
The significance of this piercing pattern increases if the second day's opening is below a support area and the close is above the support area. If the second candle is a white marubozu or with a shaven head or shaven bottom, it speaks of the more bullishness of the market. Its importance is even more if it is accompanied by increased volume.
If you are holding a short position, Piercing Candlestick Pattern pattern should alert you to take action the next day. One can cover her short position above the high of the second day's white candle.
A long trade can be entered above the high of the second day's white candle. Place a sell on stop order below the low of the pattern to limit your loss, in case the down trend continues to go down.
Piercing pattern may occur along a down trend without a reversal. It only exhibits a minor profit booking by bears.
Counter part of this piercing pattern is bearish reversal pattern called Dark Cloud Cover Candlestick Pattern.
Read and learn about it by clicking on the link below.
There are many more complex candlestick patterns used in stock analysis. Some of them are listed below. You may click on the name of each pattern listed below to learn and understand more about them.
Dark cloud cover is a bearish reversal candlesticks pattern. They occur at the top of an up trend.
Bullish Engulfing Pattern is a major bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
Bearish Engulfing Pattern is a major bearish reversal candlesticks pattern. They occur at the top of an up trend.
Morning Star is a bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
Evening Star is a bearish reversal candlesticks pattern. They occur at the top of an up trend.
Morning Doji Star is a bullish reversal candlesticks pattern. They occur at the bottom of a down trend.
Evening Doji Star is a bearish reversal candlesticks pattern. They occur at the top of an up trend.
Three White Soldiers is a candlesticks pattern formed by a group of three white candles, which shows the strength of the advancing market.
Three Black Crows is a candlesticks pattern formed by a group of three black candles, which shows the strength of the declining market.
Harami is a candlesticks pattern, which shows the indecision of the market. In Japanese language, it means, pregnant. It is made of two candles, one containing the other.
Gaps are continuation chart pattern, formed by an unfilled space between two trading session. Gaps are referred as Tasuki, meaning window in candlestick charting.
Island Formation is a reversal chart pattern, formed by price action in a group of multiple time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.
Abandoned Baby is a reversal chart pattern, formed by price action in a single time period, which is separated from rest of the price action by gaps. It is very reliable with 80% probability.