What Is A Piercing Line Pattern? We Explain How To Read Its Signals
The formation of a Piercing Line indicates that the bears are about to lose control of the market and that the bulls are beginning to take charge. When the subsequent candlestick closes at a price that is even higher than the Piercing Line, the pattern has been confirmed. The next bearish candlestick’s beginning point is lower than the preceding bearish candlestick’s closing point. After the day, the bulls prevailed, and the closing price was higher than the center of the previous bearish candlestick.
It is almost impossible to find a textbook example on liquid intraday markets. In early August 2024, stock markets were pressured by recession fears, fueled by weak U.S. labor market data. Bearish sentiment in the S&P 500 futures market was further amplified by a downturn in the Japanese stock market. This pattern is confirmed in about 72.9% of cases based on an analysis of 4,120 markets. Confirmation typically occurs within 2.3 candles, while disconfirmation happens within 4.3 candles.
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This indicates that prices have dropped to a level where traders are enthusiastically buying the asset, suggesting that it might reverse the downtrend. To assess how well you might do with trend reversal patterns, try using the ATAS Market Replay simulator for trades. This feature of the ATAS platform uses historical data to recreate real-time trading conditions. Traders can hone their skills in completely real conditions, avoiding any financial risks. Multiple candlestick patterns are often confused with the piercing pattern.
Fibonacci Retracement Levels
- On the contrary, the higher the time frame, the stronger and more accurate signals it gives, as higher time frames filter market noise.
- Forex and crypto traders shouldn’t trade this pattern due to a lack of data and statistical significance when determining the best piercing pattern trading strategies.
- It closely resembles a bullish engulfing pattern, which is a two-candle pattern and has a similar appearance.
- The greater the gap and the smaller the shadow of the second candlestick, the stronger the signal for upward momentum is.
In this case, a long trade can be opened at $45.66 after all these reversal candlestick patterns have been formed. A bearish piercing pattern is a candlestick pattern that can predict bearish market conditions. The pattern consists of two candlesticks, the first of which is black and the second of which is white. A Piercing Line is an indicator used in technical analysis that suggests a reversal in the current trend. This signal is created when the price of an asset moves below a previous low, and is then followed by a period of consolidation before breaking above the high of the initial candlestick.
Piercing Candlestick Pattern – What Is It and How To Use It
They must first confirm the validity of the pattern by making sure the second candle closes above the first candle’s midpoint. They should then think about the bigger picture of the market and search for additional signs or patterns that back up the bullish bias suggested by the Piercing Line pattern. Traders should control risk by placing stop-loss orders and analysing the trade’s risk-to-reward ratio. The trader may think about opening a long position if the Piercing Line pattern is verified and the market environment supports it. It is very important to keep a close eye on the price movement and be ready to close the position if the market turns against the trader after the trade has been placed.
Yet, the second day’s gap down offers optimistic traders a chance to enter the market at a discount. The piercing line pattern is frequently used by traders as a buy signal, signalling that the bearish trend may be coming to an end and a bullish trend may be beginning. Before making any trading decisions, traders should always double-check the pattern using other technical indicators and fundamental research. Traders may interpret it as a buy signal when a Piercing Line pattern appears on a price chart.
This pattern can also emerge in the middle of a bullish trend, signaling the continuation of bullish momentum. The height of the triangle measures the price movement within this pattern. Due to the fact that the gap formed after the first candlestick acts as a strong resistance for buyers, the pattern belongs to the reversal patterns of candlestick analysis. For the pattern to be valid, there should be some trading activity after the second candlestick is formed.
In this case, you’ll see a long bullish candle followed by a long bearish candle that closes below 50% of the body of the previous bullish candle. The piercing line is a two-candle chart pattern that appears at the bottom of a downtrend and indicates that the existing trend might change direction. Much like many other trend reversal patterns, technical traders use the piercing pattern to spot new price trends and find buying opportunities.
This situation indicates that the reversal signal is false and the downtrend is expected to continue. If a more conservative trading strategy is used, it is better to get additional confirmations after the pattern appears using other candlestick patterns or technical indicators. The piercing line candlestick pattern is an indication of a bullish reversal that develops near the end of a downtrend. As bulls enter the market and drive prices higher, it frequently results in a trend reversal.
The second day’s white candlestick rebound from a down gap to a midpoint closing high is expected to be a sign that a support level has been reached. This may occur because the market specialist or market makers set the opening price lower than the previous day’s close. When this happens at the market open, enthusiastic buyers may step in and reverse the price action right from the beginning of the trading day.
Let’s use MercadoLibre’s (MELI) daily chart on October 8th, 2008, to clarify this. The Dark Cloud Cover pattern is the bearish version of the Piercing Line. A classic example of the “Piercing” pattern formation can be observed on the chart of Airbus, Europe’s largest aerospace company. It is also important to consider the time frame and value of the asset’s move. Bullish Engulfing Pattern is typically viewed as being more bullish than the Piercing Pattern because it completely reverses the losses of Day 1 and adds new gains. Bulls were successful in holding prices higher, absorbing excess supply and increasing the level of demand.
A piercing pattern is a two-day, candlestick price pattern that marks a potential short-term reversal from a downward trend to an upward trend. The pattern includes the first day opening velocity trade near the high and closing near the low with an average or larger-sized trading range. It also includes a gap down after the first day where the second day begins trading, opening near the low and closing near the high.
This bearish candlestick is typically a Marubozu candlestick with no upper or lower shadows. In essence, traders use this classical chart pattern to identify the change in the trend and find entry and exit levels. This pattern indicates that buyers have gained control avatrade review after a period of selling and is considered a bullish signal. Traders often use the piercing candlestick pattern along with other technical indicators to make trading decisions.
It signals that the market failed to stick to new lows, and bulls started to act actively. The candlestick pattern urges bears to close their trades in anticipation of the downtrend changing to an uptrend. The Piercing Pattern is a bullish candlestick pattern that appears after a period of selling pressure. The Piercing Line is typically seen as a bullish signal, indicating that buyers are willing to step in and buy after a period of pressure on selling. Alternatively, if an uptrend and a red candle Engulf a green candle, this would be considered a bearish reversal signal. There are many ways to trade engulfing patterns, but the most important thing is to ensure that you are using them in context with the overall market trends.
The close should also be a candlestick that covers at least half of the upward length of the previous day’s red candlestick body. The Piercing Line candlestick pattern is viewed as a bullish reversal pattern. For example, a long bearish candlestick is formed after a bullish candlestick and closes below the previous candlestick’s low.
