How to Identify & Trade Piercing Patterns

  • June 4, 2018

Watch our video on how to identify and trade piercing patterns.

What Is a Piercing Pattern & How to Identify These Patterns?

  • A piercing pattern consists of two candlesticks that form near support levels where the 2nd candle pierces into half or part of the 1st candle. Typically, when the 2nd candle forms, it creates a bullish reversal pattern. Traders go long at the break above the 2nd candle and use a close below it as a stop level.

These patterns are two candlestick patterns that form during a downtrend that show signs of a potential bullish reversal. The piercing pattern can be used as an indicator to buy a long position or close a short position. Watch our video above to learn more about how to trade this popular reversal pattern.

While piercing patterns can signal a bullish reversal, you need other indicators to confirm the move. This pattern is formed because the bulls and bears are fighting for control of direction.

The tug of war caused by buyers and sells form Japanese candlesticks patterns. We use these patterns to trade. The patterns we trade are made up of candlesticks that tell as story.

Without the stories of candles like bullish candlesticks as well as doji candlesticks we wouldn't know how other traders felt. We need that information to trade (bookmark our stock lists page which is updated daily).

1. Basics of Piercing Patterns

The piercing pattern is formed when the bulls come in to stop a downtrend. Price is falling but the bulls come in to push it up.

The first day is a red day. The next day opens with a new low but closes at the midpoint of the real body of the first day.

The second candle tends to be green because of the bulls. The real body of a candle is made up of the open and close of the price. The upper and lower wick is the high and low of the day.

The piercing pattern gets its name because bulls come in to pierce price through the falling trend. It's an important pattern to pay attention to.

As stated earlier, you need more than just that pattern to confirm the reversal. Patterns fail all the time and 2 candle patterns are no different.

We teach how to trade candlesticks on our live daily streams. Check out our trading service to learn more. Take our candlestick reversal course.
Piercing Patterns

2. Technicals of Piercing Patterns

Piercing patterns may indicate that a bullish reversal is imminent but it doesn't always shape up that way. Placing an order based off of one small pattern is a great way to blow up your account (try our stock picks service free for 14 days).

There are small patterns that form inside larger patterns all the time. You may have a bullish reversal pattern form but is it inside a larger bearish pattern?

It's good to look at larger time frames like the daily chart. This allows you to see the bigger picture. You can spot the symmetrical triangle patterns or bull pennants and bear pennants. Zoom in and see patterns like the cup and handle or head and shoulders pattern.

You can then zoom in again and see the even smaller patterns like piercing patterns or shooting star patterns. Candlesticks not only tell a story by themselves, the group together tell bigger stories (bookmark our penny stocks list and stock watch lists pages, which are updated daily).

How to Trade Piercing Patterns

  1. How to trade piercing patterns:
  2. Watch for 1st bearish candlestick to form
  3. Next, watch for 2nd bullish candlestick to pierce half or part of 1st candle
  4. Then, watch for 3rd candlestick to break above the 2nd
  5. Traders take a long position once price breaks above the 2nd candlestick
  6. Place stop below the base of the 2nd candle
  7. Some traders take a short position once price breaks below 2nd candle
  8. Then place stop above the 2nd candle

1. Confirmation

You can't buy or sell a stock based off piercing patterns alone. While they do indicate when you should buy a stock or close your short position, you need confirmation.  

Confirmation is given by indicators such as moving averages, MACD (moving average convergence divergence) and RSI (relative strength index). Moving averages such as the simple moving average formula act as support and resistance.

If you get a reversal pattern and it doesn't reverse right away or at all, take a look at the moving averages. Look at RSI and MACD also. They could be showing something different than that pattern.

We have these tools that allow us to get a clearer picture of what's happening. They can't predict what will happen though. If they did, everyone would be a trader who never lost money.

Looking for more stock training? Take our free stock trading courses to help you get started.
piercing patterns

You can see a piercing pattern formed on Lowes but it didn't reverse to signal a long position or to close a short position, as there was no confirmation or continuation. It respected the moving average lines as support and resistance and eventually gaped down and continued its bearish trend.

Final Thoughts

Like any pattern piercing patterns are good to pay attention to. If you're swing trading the pattern, you need confirmation. As you can see form the charts above, the reversal didn't happen right away.

Pay attention to technical indicators and bigger patterns. That might seem like a lot but that's trading. No trader is 100% successful. If they tell you they are, they're lying.

Study patterns, candlesticks and technical analysis. Open a simulated account and practice trading in there before using real money.

You learn what mistakes you're making and how to fix them. You'll be a much better trader that way. In the end isn't that the goal? Take our free online courses

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