Piercing Line Candlestick Pattern
The piercing line candlestick pattern is a bullish candlestick pattern that forms after an extended bearish trend. It can be used as an indicator to predict the resumption of the uptrend as it shows market indecision at support levels, which then reverses as bulls overpower bears to push prices higher again.
A piercing line candlestick pattern consists of two candlesticks, with the second candlestick opening lower than the first and then closing higher, piercing the top of the first candlestick’s body (also known as the real body). The piercing line candlestick pattern is seen as a bullish signal because it indicates an upward trend continuation, signalling that prices will continue to rise. It may also indicate support levels, as shown by price bouncing off of the bottom of the second candlestick’s body.
The piercing line candlestick formation has two white candles back to back with a black candle in between them.
- The first white candle must be significantly longer, but not exceptionally so. That is, it should not be much longer than 2/3rds of its predecessor or successor candles. It could be anywhere from 1/3rd to 2/3rds long.
- The second candle has a body that can either completely overlap with or very nearly overlap with its predecessor’s body. A third candle forms between these two candles, and it must have a large real body that is somewhere between twice and four times as large as its small real body.
- The third candle closes well into or right above its real body. Ideally, there will also be an upper shadow on one side of this large real body to make an appearance about halfway through the session.
A piercing line candlestick pattern, also known as a Doji star, is a reversal signal similar to a hammer or inverted hammer. Like these patterns, a piercing line occurs when price gaps down but then closes near its opening price. The most common variant has a long lower shadow and small real body near its open price.
Piercing lines that gap higher tend to have larger real bodies. Piercing lines that gap lower tend to have smaller shadows and longer bodies than those that gap higher. Overall, piercing lines are bearish reversal signals (they suggest weakness), with confirmation at least until traders can close below yesterday’s low (for bearish piercing lines) or above yesterday’s high (for bullish piercing lines).
The piercing line candlestick pattern occurs when price trades within a contracting range and then pierces through that range. The candle will be green for an upward piercing line or red for a downward one. If the price trades beyond, you should expect the price to move further in that direction. Piercing lines are significant reversals. It signals that price has rejected its previous trading range. This causes traders to buy near lows because buyers believe there’s more room for appreciation. When prices pierce down, sellers sell into strength (with fear of not being able to cover their shorts) because they think prices are moving even lower after rejecting support levels.
How a Piercing Pattern Works
A piercing pattern forms when a security opens at a significantly lower price than its previous close, 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 into that category: It offers confirmation after a stock has pierced below its opening price and closed below it again, but before it begins trending in another direction. You can also look for a piercing line on higher time frames as part of a larger strategy based on using patterns over multiple time periods. In those cases, traders look for trends from 5-minute charts all the way up to daily charts.
The piercing pattern indicates a reversal in a prevailing trend. The security closes above its midpoint but immediately moves back below it. Additionally, volume must be lower on both peaks and valleys compared to what’s been seen over recent periods. If these conditions are met, traders can buy after a piercing through its high or sell after a piercing through its low, expecting an eventual move back up or down to complete a reversal.
Piercing patterns are relatively rare, so using them as standalone signals can be risky. They perform best when combined with other charting methods such as candlesticks or traditional technical analysis indicators. For example, if you see a bullish piercing pattern forming alongside an upward sloping moving average (MA), then there's more than one reason to take a position. Because of their relative rarity and other usage factors, piercing patterns aren't widely considered reliable signals for short-term day trading. However, they're often used by long-term investors looking for confirmation of major reversals or trends that could last weeks or months rather than days.
The piercing line candlestick pattern represents a bullish reversal in an uptrend. It’s when price breaks above resistance, which usually leads to strong bullish movements. Like other candle patterns, however, piercing lines are best used in conjunction with other analysis techniques. The candlesticks that form these patterns often overlap or have a little separation. So, you must combine them with other forms of technical analysis when using them to guide your investing strategies.
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Frequently Asked Questions
A Piercing Line (Piercing Pattern) indicates a potential trend reversal after showing indecision between buyers and sellers. It can be found in either an uptrend or downtrend. When it appears in an uptrend, it suggests that traders should close their long positions and open short positions because a reversal might be developing.
A Piercing Line also shows where prices fell after spiking above resistance but then closed near that price. In a downtrend, a Piercing Line occurs when prices break below support levels but close near those levels. In both cases, a gap down on low volume following a Piercing Line signifies strong bearishness among traders. This gap down on low volume should indicate whether you should open new shorts or enter into other bearish strategies. If you do see one of these patterns in your charts, however, remember that it’s simply another sign of indecision between buyers and sellers; don’t consider them alone.
To understand bullish piercing, it’s first important to grasp candlesticks and what they mean in regards to price movements. There are four primary patterns that can be found: a doji (indicating indecision), a hanging man (indicating an imminent decline), a hammer (indicating a brief recovery) and lastly, and the currently elaborated bullish piercing.
Piercing lines describe those candles with no upper shadow; generally speaking, these occur after extended declines or uptrends. Piercing lines signal potential reversals as they suggest high-volume bullish moves as well as substantial buying pressure. It’s like bottoming out on one side of a candle and not seeing support until you reach its very top on the other side – hence piercing through resistance levels established earlier in its trend.
Like hammers, piercing lines typically contain smaller bodies than their preceding wicks. For bullish piercing patterns, however, it’s also important for there to be some sort of protrusion beyond each extreme point or level indicating some sort of breakout above resistance movement. A breakout above major areas of resistance usually signals exhaustion on part of sellers who have been holding down prices over time leading up to such a move.
The piercing line candlestick formation is a trend reversal signal that indicates that a prior decline in price has been exhausted and that prices will begin to rise. A piercing line occurs after a decline when there is a large white candle with a long upper shadow and small real body which pierces (breaks) through prior support levels. In addition, volume on an upward close usually increases on at least one of these days. These signals buyers coming back into the market which causes an upturn in prices.