All about Piercing Line Candlestick Pattern

Stock markets are home to many different types of investors. Some invest over the long-term, while others are quick to sell. Traders use technical charts and other tools to invest with a limited investment horizon. Candlestick charts are one of the most used trading tools. The colour-coded sticks provide excellent indicators of future price movements. Bullish short-term reversal patterns include the piercing candlestick.

Formation:

This piercing line candlestick pattern was formed over two days, with the first stick being influenced by sellers and the second by buyers. It signals a short-term upward trend by signaling the end of a trend. The piercing candle pattern of a line is usually preceded by a wider trend of declining price movement. This indicates that the stock of shares to sell has exceeded its maximum limit. Slowly, the buyers take over the market and drive up the share price

Two consecutive candles form the piercing-line candlestick pattern. The first candle opens close to the high and closes at the low for trading with average or larger sizes. The first candle is red because it signifies a downward move. A green-colored candle follows the red one. However, there are some fine indicators to keep in mind.

The gap is formed when the second candle in a piercing-line candle pattern opens. Stocks are not able to form a gap because the day's opening price can differ from the day before. A gap is the second candle in a bullish-piercing line candlestick pattern. This means that the opening price is lower then the closing price the previous day. The second candle should close at the opening price of day one. For a clear pattern of piercing lines, the second green candle should cover at least half of the red candle from the previous day.

How do you trade?

A bullish piercing candlestick pattern with a bullish piercing lines pattern is an indicator that trend reversal has occurred. The piercing lines pattern may not suffice to indicate a trend reversal. This pattern must be viewed in conjunction with other indicators that indicate a buy signal. To form a piercing lines pattern, the second candle must cover half of first candle. It is not necessary to cover the entire red candle. This means that the bulls could not reverse their losses from the previous day. If other technical indicators such as RSI, Stochastic, or MACD show a bullish divergence while the formation of a piercing pattern, there is a greater chance that the upward trend will continue.

The volume of trades is another important and simple aspect to consider. The likelihood of a downward trend ending is stronger if the volume is higher than the average on the second day.

Engulfing Pattern :

A bullish reversal pattern is the piercing-line pattern. However, if the second candle closes at the same level as the first, it becomes a bullish embulfing pattern. A bullish engulfing candle follows the red candle and completely covers it. This is in contrast to a piercing-line pattern which only covers half of the candle. A bullish engulfing signal is more reliable than a piercing-line pattern. Bulls are more dominant in bullish engulfing patterns on the second day. The second candle opens with a gap, but closes higher than the opening price of first candle. This completely engulfs it. The bullish engulfing is similar to the piercing lines pattern. It is worth knowing about. A bullish engulfing candlestick pattern can be transformed by a slightly stronger rally on the 2nd day.

Conclusion:

A key indicator of price reversal is the piercing candle pattern. It is often found in congestion zones, where both lines have small ranges. If they are located in a congestion area, avoid trading on the basis piercing line patterns. Only trade piercing lines patterns if they are clearly visible on the charts.