Different types of participants operate in the stock markets. Some people invest for the long term, while some square off their positions within minutes. Traders invest with a short investment horizon, using technical charts and tools. The candlestick chart is one of the most popular trading tools. Different patterns formed by the colour-coded sticks are an excellent signal for the movement of the price in the future. The piercing line candlestick is a bullish short-term reversal pattern.
Formation :
The piercing line candlestick pattern is formed over two days with the first stick influenced by sellers and second one dominated by buyers. It marks the reversal of a trend and is a signal for a short-term upward movement. The piercing line candle pattern is generally preceded by a broader trend of downward price movement. It signals that the supply of shares to be sold has reached the maximum limit and gradually the buyers start dominating the market driving up the price of the shares
The piercing line candlestick pattern is formed by two consecutive candles. The first candle opens near the high and closes near the low with average or larger-sized trading range. Since the first candle signifies a downward movement, it is red in colour. The red candle is followed by a green-coloured one, but certain fine indicators have to be kept in mind.
In a piercing line candle pattern, the second candle opens with a gap. The formation of a gap is only possible in stocks as the opening price on a day can be lower or higher from the previous day. The second candle in a bullish piercing line candlestick pattern opens with a gap, which means the opening price is lower than the closing price of the previous day. However, the second stick should close near the opening price of the first day. The second green candle should at least cover half of the previous day’s red candle for a clear piercing line pattern.
How to trade :
The bullish piercing line candlestick pattern is an indicator of trend reversal. However, just relying on the piercing line pattern to give a buy signal may not be sufficient. The pattern has to be seen with other indicators that confirm a buy signal. The second candle has to cover only half of the first candle to form a piercing line pattern. Covering the entire red candle is not mandatory. It means the bulls were not able to completely reverse the losses of the first day. When other technical indicators like RSI, Stochastic or MACD show a bullish divergence at the same time as the formation of a piercing line pattern, then there is more likelihood of the upward trend to continue.
Another simple but important aspect to take into consideration is the volumes of the trade. If the volume on the second day is more than average, it is a stronger signal of the likely end of the downward trend.
Engulfing pattern :
The piercing line pattern is a bullish reversal pattern, but if the second candle closes above the opening level of the first candle, it turns into a bullish engulfing pattern. In a bullish engulfing pattern, the green candle which follows the red candle completely covers it, unlike the half coverage in a piercing line pattern. The bullish engulfing pattern is a stronger indicator of a price reversal than a piercing line pattern. The bulls are more dominant on the second day in the case of a bullish engulfing pattern as the second candle opens with a gap but closes above the opening price of the first candle, completely engulfing it. It is important to know about the bullish engulfing pattern as it is very similar to the piercing line pattern. A slightly stronger rally on the second day can turn a piercing line candlestick pattern into a bullish engulfing pattern.
Conclusion :
The piercing line candle pattern is a crucial indicator for price reversal. On many occasions, it is found in congestion zones with both lines having small ranges. Avoid trading on the basis of piercing lines if they are formed in a congestion zone. Trade piercing line patterns only if they appear clearly on the charts.
