Best candlestick patterns: piercing candlestick pattern

When a candlestick pattern appears all over our charts, how useful is it?

Perhaps we stop noticing it at all.

That’s often the fate of the piercing candlestick pattern. It’s very common, it doesn’t stand out as unusual. But this mundane pattern can be one of the most powerful when it’s correctly applied.

What a piercing candlestick pattern looks like

The piercing candlestick pattern is a reversal signal. In a downtrend, a bullish piercing pattern takes the form of a red candle followed by a green candle, with the body of the green candlestick extending more than halfway up the body of the red candle.

In an uptrend, a bearish piercing pattern forms as a green candle followed by a red candle, with the body of the red candlestick closing more than halfway down the body of the previous candle.

Ideally, the second candle will open below the close of the first candle in a bullish pattern; and in a bearish candle, the second candle will open higher than the first candle closed. I.e. there is a price gap between the close of the first candle and the open of the second.

Also, where the bodies of the candlesticks are longer, the more powerful the piercing reversal signal is.

What is a piercing candlestick pattern telling us?

A piercing candlestick is a reversal pattern showing a shift in market sentiment. I can be useful to understand exactly what’s going on within a pattern to understand trader behaviour ….

In a bullish pattern, we’re in a downtrend, with sellers in control of the market for the first candlestick, and buyer taking control in the second. The gap down between the close of one candle and the open of the next may only be very modest, but represents an ‘exhaustion gap’ – sellers have driven prices down to the extent that volume dried up, and buyers step in to reverse the trend. There’s a common adage about the market always ‘filling a gap’ – our second candlestick does that, and some more, driving up beyond the halfway point on the previous candle’s body.

And a bearish piercing pattern is the reverse of this.

How to spot piercing candlestick patterns

Crucially, we are looking for candlestick reversal patterns on key levels. This means that on areas of support/resistance, or where another technical indicator signals a potential reversal.

Here we have the price moving in an upward channel, so we’re looking for piercing patterns at the turning points …

The gapping may only be small, depending on the scale and liquidity of the market you’re looking at. The image above is from a major forex pair.

While the example below is on an individual stock …

Seeing the wood for the trees

While some candlestick patterns jump out at you, the piercing pattern is a quiet one. They are all over the place on our charts once we start digging, but that doesn’t mean they have less value –  they are actually one of the more reliable candlestick signals.

Get used to spotting them, and look out for good examples, especially with a gap and long bodies. You’ll find they help get you into the best market moves.

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