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All you need to know about piercing line candlestick pattern A traders handbook

04 Dec 2023

Introduction:

In the dynamic world of stock market trading, success often lies in your ability to speculate market trends and make informed decisions. The prices of stocks are highly volatile, and you may incur significant losses if you aren’t diligent enough. 

One invaluable tool you can use to gain insights into market movements is the study of candlestick patterns. These patterns comprise a series of one or more candlesticks depicted on a price chart. They offer visual representations of market sentiments, allowing individuals to make informed trading decisions based on historical price data.

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Each candlestick depicts a specific trading period, such as a day, week, hour, or even a few minutes, and displays the opening, closing, lowest, and highest prices. The opening and closing prices are depicted by the candle’s body, which is typically colored red or green (black or white in some cases) to indicate the direction in which the stock has moved during the trading period. The highest and lowest prices are represented by the thin lines (known as wicks) extending above and below the body. 

What is a piercing line candlestick pattern?

One of the most significant candlestick patterns is the piercing line candlestick pattern. It is a two-candle pattern that occurs during a downtrend, signaling a potential reversal of the prevailing bearish sentiments. Hence, it can be used to indicate entering a new long position or exit your existing short position. The piercing line candlestick pattern is formed when both buyers and sellers fight to gain control over the stock. The following features can characterise this pattern:

  • The first candle is bearish

The first candle in a piercing line candlestick pattern is bearish, reflecting the existing downtrend. Its red or black coloured body can identify it. This candle signifies that the sellers are in control of the stock. 

  • The second candle is bullish

The second candle in a piercing line candlestick pattern is bullish, reflecting the beginning of a new uptrend. Its green or white coloured body can identify it. This candle signifies that the buyers are regaining control over the stock, and a trend reversal can be around the corner.

  • Opening and closing of the second candle

In the piercing line candlestick pattern, the second candle opens below the closing point of the first candle. This happens due to a gap-down opening of the stock for the next trading period. However, the closing point of the second candle is more than halfway into the body of the first candle. Ideally, the closing point of the second candle is above the mid-point of the first candle. 

  • Appears at the end of a downtrend

The piercing line candlestick pattern appears at the end of a downtrend. The first candle in this pattern signifies that the sellers controlled the stock, resulting in a bearish trend. However, the formation of the second candle, with its closing point near the mid-point of the first candle, indicates that the buyers are regaining control and, subsequently, marks the end of the prevailing bearish trend and the beginning of a new bullish trend.

Trading strategies for piercing line candlestick pattern

The piercing line candlestick pattern is significant as it suggests a potential trend reversal from bearish to bullish. Below are a few trading strategies you can consider:

  • Enter a new long position

The piercing line pattern strongly indicates that the stock's selling forces may weaken, and the buyers are stepping in. It suggests a potential reversal of the trend from bearish to bullish. Hence, it can be a good opportunity to enter a new long position or exit your existing short position.

  • Confirmation with other technical indicators

While a piercing line pattern is a strong indicator of a trend reversal, you must always confirm with other technical indicators and chart patterns before making a trading decision. For example, a surge in volume during the pattern formation strengthens the reversal signal.

  • Risk management

Adopting adequate risk management strategies during trading can help you mitigate the risk of huge losses. For example, you can place a stop loss at the low of the second candle while entering an extended position.

To conclude

The appearance of the piercing line candlestick pattern indicates the end of a downtrend. However, you must confirm your trading decisions with other technical indicators and adopt appropriate risk management strategies.

 

Related Articles: What Is Candlestick Wick Analysis | What Is On Neck Candlestick Pattern | What is Three Inside Down Candlestick Pattern | What Does a Paper Umbrella Candlestick Indicate | All you need to know about the tweezer bottom candlestick pattern

 

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