Piercing Pattern: Definition, Formation, and Strategies

As India’s growth story has picked up pace, people are experimenting with investments that were not conventionally followed in this part of the world. Just a couple of decades ago, stock markets were a thing of the elite. But over the years, the masses have broken through the shackles and started investing in the Indian stock markets.

While equity investments provide good returns and liquidity, they involve high risk. However, there are tools like fundamental & technical analysis used by investors to minimize risk in the stock markets. One such technical analysis tool is “Piercing Pattern”. Keep reading to learn how you can use this tool to your advantage!

What Is a Piercing Pattern?

As the name suggests, a piercing line pattern refers to a candlestick formation that shows the effect of piercing through an ongoing trend to reverse it. It can be both bullish & bearish depending on the preceding trend.

Bullish Piercing Pattern

So, here’s the definition of a bullish piercing pattern:

In an ongoing bearish trend, 2 consecutive candles are formed such that:

• The first candle is bearish
• The second candle is bullish and shows the following:
  • A Gap down opening from the close of the first candle, and
  • The price closes above the midpoint of the bearish candle, i.e. above 50%

The following image represents a bullish piercing pattern.

*Red Candle: A bearish candle with a lower closing price than the opening price.

**Green Candle: A bullish candle with a higher closing price than the opening price.

Bearish Piercing Pattern (Dark Cloud Cover)

It is the polar opposite of the bullish pattern. So, here’s the definition of a bearish piercing line pattern:

In an ongoing bullish trend, 2 consecutive candles are formed such that:

• The first candle is bullish
• The second candle is bearish and shows the following:
  • A Gap up opening from the close of the first candle, and
  • The price closes below the midpoint of the bullish candle, i.e. below 50%

The following image represents a bearish piercing line pattern.

Also Read: Tweezer Bottom Pattern

Understanding Piercing Pattern

When we discuss the piercing line pattern, whether it is bearish or bullish, it is more important for traders to interpret it correctly to unlock the pandora’s box. Here’s a comparison to know the difference:

How Does a Piercing Pattern Work?

Now that you have learned how to identify the piercing pattern, the next step is to understand where you can enter the trade and what is the expected return on investment. Here’s how traders interpret the piercing price pattern to make profitable trades:

Piercing Pattern Formation

Piercing Pattern appears after a noticeable downtrend where the first candle is the large bearish candle with a closing near its low, indicating bearish dominance.

The second candle gives a gap down opening and closes above the midpoint of the first candle’s body, indicating a strong recovery by buyers.

How to use Piercing Candlestick Pattern in Trading?

Follow the given steps to use piercing candlestick pattern trading:

Identify the Pattern: Look the pattern through support levels.

Get the confirmation: Use volume, RSI, or MACD for confirmation.

Entry: Enter the long position when the price exceeds the high of the second candle.

Stop Loss: Place the stop loss order below the low of the second candle.

Exit: Target previous resistance levels or use a trailing stop.

Risk Management: Use technical indicators and take the risk according to the capital.

Piercing Line vs. Dark Cloud Cover

Piercing Pattern Success Rate

The success rate of piercing pattern depends on several market factors like market conditions, time frame, and additional technical indicators used for confirmation. According to some studies piercing pattern has a success rate of about 60-70% when combined with additional confirmation signals (like volume, RSI, or trendlines).

Advantages and Disadvantages of Piercing Pattern Candlestick

Example: Piercing Line Pattern

Let’s see a practical example of the Bullish Piercing Pattern in the Nifty 50 chart.

The following image shows the chart of Nifty in the discussed time frame:

We use the trailing stop loss method when the target price is uncertain. As the price of a stock goes up, we place a stop-loss order below the previous closing price.

Is the piercing pattern bullish or bearish?

Piercing patterns can be both bullish or bearish, depending on the direction of the preceding trend. Here are the key characteristics of both the patterns:

• Bullish Piercing Pattern 
  • The market is in a downtrend with consecutive bearish candlesticks
  • The price can be close to an important support level
  • 2 consecutive candlesticks are formed:
    • 1st Candle: A large bearish candlestick 
    • 2nd Candle: A bullish candlestick that opens below the previous day’s low and closes above the midpoint of the prior day’s candle
  • This suggests:
    • a potential reversal of the downtrend 
    • buying pressure has overwhelmed the selling pressure
• Bearish Piercing Pattern
  • The market is in an uptrend with consecutive bullish candlesticks
  • The price can be near an important resistance level
  • 2 consecutive candlesticks are formed: 
    • 1st Candle: A large bullish candlestick 
    • 2nd Candle: A bearish candlestick that opens above the previous day’s high and closes below the midpoint of the prior day’s candle. 
  • This suggests:
    • a potential reversal of the uptrend
    • selling pressure has overwhelmed the buying pressure

In a nutshell

• The piercing patterns shows trend reversal
• It can be both bullish or bearish
• To confirm the pattern you should check other factors like,
  • Preceding Trend
  • Support/Resistance Levels
  • Volumes
  • RSI overbought/oversold
  • External Factors
  • Fundamental Analysis
• You can set the targets in many ways as discussed in this blog
• Monitor the price fluctuations closely
• Always keep a trailing stop loss as a safety net

If you follow all the steps discussed in this blog, you will be able to profit from the piercing patterns whenever you see it in a stock’s chart!

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