A piercing pattern is a two-day candlestick pattern which, if identified correctly, can predict a reversal in market momentum. Despite most two-day patterns being common, a piercing pattern is considered accurate due to its nature of requiring certain movements before it for confirmation of the signal it provides. To understand how to identify and trade a piercing pattern, it’s imperative that you first know how to read a candlestick chart.
What is a Piercing Pattern?
To find a reliable piercing pattern, we should be looking at the daily candlestick chart. The first of the two candles in the pattern should be a red (or downward) candle with short wicks. This shows that the bears were fully in control of the market for that day. The second candle in the pattern should open below the first candle’s low and close above the mid-point of its main candle body. This signifies that buyers took over for the second day and overwhelmed the sellers, pushing the price back up.
If a piercing pattern follows a period of downward momentum, even just a short downward trend, we can expect the asset’s price to climb once again. Any green candle following a red candle should be noted by traders but what makes a piercing pattern so exciting is that it will likely take market participants by surprise. If the candle following the piercing pattern opens above with a gap, this could signify an especially bullish day.
How to Profit on a Piercing Pattern
A piercing pattern is considered a very bullish sign, especially when following a downward trend. The longer the downward trend, the bigger the upward move can be. If a trader still isn’t sure whether or not to act on the signal, they can always wait for the next day’s open. If this next candle opens with a breakaway gap, the likelihood of a bullish reversal is amplified. When other technical indicators such as the MACD or RSI are showing bullish divergence at the same time a piercing pattern occurs, this further strengthens the suggestion that a bullish reversal is on the cards.
While a piercing pattern is fairly straightforward to identify, it’s good practice to familiarise yourself with what to look for beyond just the two candles themselves. Any two-candle pattern can appear regularly on a chart but one which follows a certain trend is rarer. Furthermore, if technical graphs such as the MACD or RSI also suggest a bullish reversal, the piercing pattern is likely one of the most reliable candlestick patterns there are.
Traders should always use caution when using these methods to determine future price action and should never trade with capital they can’t afford to lose. New traders can start by paper-trading, which is a way of becoming familiar with market movements and trends without losing any money. Study the markets and make trading decisions but without physically placing the trade. Later, come back to the asset to see what would have happened had you placed the trade for real. Ok, you may be kicking yourself for not going with your gut but you can increase your accuracy without losing anything. Once you feel confident that your win percentage is high enough, you can start trading for real.