Piercing Pattern

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21 Aug, 2024

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The Piercing Pattern is a type of Japanese candlestick pattern used in technical analysis that spans for a period of two days. The pattern's formation suggests that there will be a possible short-term reversal from a downward trend to an upward trend.

The Piercing Pattern comprises a downward trend preceding its formation, a gap after the initial day, and a significant reversal in the second candle's formation. The pattern takes place over two days. The sellers are firmly in control on the first day. However, the excited buyers dominate the response on the subsequent day.

Piercing Pattern Meaning

The Piercing Pattern is a Japanese candlestick tool employed for technical analysis.
The pattern's creation indicates that there may be a short-term turnaround from the downward price movement to an uptrend.
The pattern suggests the possibility of price reversal since it indicates that the degree of selling pressure has reduced. It also suggests that the market buyers are likely to shift the price trend.
However, relying solely on these patterns without taking into consideration additional technical analysis tools or essential factors might lead to erroneous trading choices.

Piercing Candlestick Pattern Explained

The Piercing Pattern is a two-day candlestick market pattern suggesting a possible short-term turnaround from a downward to an upward trend. The pattern involves the first day, which starts around the high and closes near the low, with a trading range of average size or larger. Additionally, it contains a gap down after the initial day of trading.

The second day in the Piercing Pattern starts trading near the low and finishes close to the high. The closing must further be a candlestick that is at least half the height of the previous day's red candlestick body. It might indicate that the quantity of shares that market players are interested in selling has been slightly reduced, and the price has been pushed down to a point where demand for purchasing shares has gone up. This phenomenon is a relatively accurate indicator of a short-term upward trend.

Formation

As we can see from the TradingView piercing pattern formation chart below, before the pattern begins, there is a price decline. It could be a short decline. However, if the candles develop following an upward trend in the price, they are not a strong reversal indicator.

Source

The price difference decreases to begin the second day. This trend is prevalent in stocks, which may exhibit overnight gaps, as opposed to currencies or other twenty-four-hour trading instruments. This pattern might appear on a weekly chart in any asset class. The second candle has to close above the first candle's middle part. It suggests that the buyers have outnumbered the sellers on that particular day.

How To Trade?

When the trader detects a piercing pattern formation, they must wait till the height of the first candlestick is followed by the previous bearish candlestick. It is a beneficial trade setting for trading the piercing candlestick pattern. The stop loss must be set at the bottom level of the preceding bearish candle. These patterns are ideal for intraday and swing traders because the patterns exhibit a higher success rate over more extended periods.

Examples

Let us study the following piercing pattern examples to understand the structure:

Example #1

Suppose Amy is a trader who wants to invest in the stocks of "Roxy Ltd." She was waiting for the appropriate time to enter the market. Amy studied the company's recent candlestick patterns in order to determine this. The initial candle was red, with a larger-than-average body. The following candle was green and started below the preceding candle's low, which created a gap. Then, it closed above the first candle's middle point. The structure indicated an anticipated change in momentum from the downward direction to the upward side. It suggested that a reversal was about to occur. This is a piercing pattern example.

Example #2

On June 21, 2023, the Nifty developed a bullish piercing pattern. The momentum marker Relative Strength Index (RSI) was displaying a bullish crossover. The Indian equities market was anticipated to move cautiously on the next day after ambiguous signals from Asian competitors and the overnight drop in stocks in the United States. Investors were apprehensive before the United States Federal Reserve Chair Jerome Powell's hearing before the Congress.

Benefits

The benefits of piercing patterns in candlesticks are:

The pattern provides traders with a clear indicator that the market's attitude may be turning from bearish to bullish. This shift in the perspectives might suggest a window of opportunity for buyers. Traders can utilize this information to help them make better decisions about when to enter or exit transactions.
The pattern is an indication of a potential price reversal because it signifies the level of selling pressure has decreased. This implies that buyers are potentially stepping in and could be turning the price trend.
Traders often use the pattern in combination with additional economic indicators, like moving averages or volume metrics, to verify the likelihood of a change in direction and improve the accuracy of their trading decisions.

Limitations

Some limitations of the piercing pattern in candlestick include the following:

This candlestick pattern appears very rarely. Therefore, the pattern is quite challenging to forecast.
The candlestick pattern is less effective than the doji or morning star. False indications appear at a higher rate than in the other patterns.
Depending entirely on these patterns without taking into account other technical analysis instruments or fundamental aspects can result in incorrect trading decisions.

Piercing Pattern vs Bullish Engulfing

The differences between the two are as follows:

Piercing Pattern

This pattern is a two-day candlestick pattern that indicates a possible turnaround from a downward to an upward trend.
The candle pattern usually predicts approximately five days in advance.
The formation has three distinct features. They are a downward trend before the pattern appears, a gap after its initial day, and a decisive turnaround as the pattern's second candle.

Bullish Engulfing

The Bullish Engulfing Formation is a two-candle pattern. In this case, the price increases above the body of the previous candle and then engulfs it.
The first candle is a bearish formation that formed during the downward trend. The second candlestick is a bullish one that entirely engulfs the previous candlestick's body.

This structure is an incredibly robust bullish reversal pattern. The bullish pattern emerges when the bulls engulf the body of the preceding bearish candle.

Frequently Asked Questions (FAQs)

How accurate is the piercing pattern?

The anticipated performance of this pattern candlestick is a bullish turnaround. Studies have shown that it behaves in this manner sixty-four percent of the time. The results are satisfactory. Moreover, the overall performance was thirteenth out of over one hundred candles. Furthermore, with a frequency score of forty, traders tend to notice it quite commonly in a historical price trend or in real-time.

What is the opposite of the piercing pattern?

The bearish equivalent of this candlestick pattern is a dark cloud pattern. It comprises an upward movement concluding in a solid green candle, a gap upward. It also includes a red candle, which indicates that the total number of sellers has surpassed the total number of buyers.

How is the confirmation of a piercing pattern achieved?

The validation for this pattern can be determined by examining additional technical indicators or price movement signs. They may include a rise in trade volume, the trend line or moving average support, or the appearance of various other bullish formations. The validation assists in confirming the possible reversal that this pattern suggests.