Trading with Candlestick Piercing Line Pattern

Tuesday, January 15, 2019

Piercing Line pattern in candlesticks is one of the indicators of reversal. You can use this as a consideration before opening a position. Candlesticks are one of the components in technical analysis that are most widely used by traders. Apart from the attractive visuals, candlesticks are considered capable of giving signals to make further decisions in trading. In other candlestick articles, our team has reviewed quite a lot about candlestick patterns and their functions for trading.

Trading Buy and Sell

Call it the Doji and Hanging Man in the family of single candlesticks, Engulfing as a double candlestick, or Morning Star in a triple candlestick group. However, have you ever heard or even found a candlestick Piercing Line pattern on the chart? Well, this type of candlestick can be used to confirm a reversal aka trend reversal. So, what are the other functions of this candlestick patterned Piercing Line? And how is the formation?

What is a Piercing Line?

Piercing Line is one candlestick pattern that is formed from two candles, so it is called a double candlestick pattern. The first candle is a bearish candle, then followed by a bullish candle. The Piercing Line can be formed because the price of the second Open candle is below the first Close candle, then the second Close candle passes the first Close body.

The Process of Forming a Piercing Line

Downtrend occurs because there are many sellers who dominate the market by selling, so that during the trend, there is a lot of candlesticks in red (Bearish). In the next session, a gap fell as the price opened slightly below yesterday's close. But after the trading session was opened, buyers dominated the market so prices slowly moved up. Until the end of the market closing session, prices can be pushed up even though they have not been able to close above the opening of the previous day. This condition underlies the formation of a candlestick Piercing Line pattern.

Using Candlestick Pattern

This can occur because of the release of impacted data and market sentiments that shape price movements. Bullish sentiment was able to make prices rise again after several declines in the previous candle period.

From the reviews above, it can be concluded that candlesticks with a Piercing Line pattern usually indicate a downtrend will end soon, or it can also be called a Bullish Reversal indicator. So, if you try to find a reversal of the trend towards the Bullish, the composition of the Bearish candle that is followed Bullish (may be) is the initial marker.

Requirements for Forming a Piercing Line Pattern

Although the above has been mentioned that the Piercing Line pattern is composed of Bearish candles followed by a Bullish candle, this statement cannot be taken as a conclusion. There are several conditions that must be met by 2 constituent candles so that they can be referred to as Piercing Line patterns. Anything?

  1. Candle making pattern must be a Bearish candle then Bullish, not upside down or from the same candle type. This is because the Piercing Line pattern is preceded by a downtrend (Bearish candle), then a Bullish candle appears as the initial marker of a reversal.
  2. The Open level on the second candle must have a gap with the Open level on the first candle. That is, the Open value between the second candle and the first candle must have a difference (Example 50 pips), so that a gap occurs.
  3. The second body candle length must enter at least half of the first body candle. If one of the candles does not meet these conditions, the pattern formed cannot be called a Piercing Line.
The following is an example of a candle pattern that cannot be called a Piercing Line:

Candlestick Pattern Example

Indications for Piercing Line Patterns

As mentioned above, the Piercing Line pattern can be used as an indicator of the occurrence of Bullish Reversal. Initially, prices declined for some time due to the high sell activity in the market. But in the next session, a lot of Buy action was done because the price was considered too cheap, so the Bullish candle was formed. Candle is a sign that the change in direction of the trend has just happened. Even so, wait for another Bullish candle to be formed so that the reversal is really confirmed.

Second, if the Piercing Line pattern has been found in the chart, the trading position that can be applied is a Buy position. You can make a Buy at that time or use a Pending Order, which is Buy Limit or Buy Stop. With the help of Pending Orders, you don't need to be in front of a computer screen for a full day.

For direct buy execution, the following guidelines can be taken into consideration if you find the Piercing Line pattern on the chart:
  • Make sure the appearance of this pattern is at the end of the downtrend (Bottom valley). To find out whether a trend is really going to end, you can use the momentum indicator, one of which is by using the Moving Average Coverage Divergence (MACD) confirmation.
Indicator Piercing Line
  • Besides MACD, you can also use the Relative Strength Index (RSI) indicator to find oversold conditions in the market. Oversold conditions occur because prices drop to a certain level, so traders will try to take Buy to raise prices at that time. If the momentum indicated by the RSI or MACD indicator shows an oversold position, then a Piercing Line pattern candle appears, so get ready to open a Buy position.
  • Wait until the next Bullish candle appears (Third candle) with High exceeding the first candle. Don't forget to set Stop Loss and Take Profit based on the trading plan you have made.
Using the Piercing Line pattern as a reference for position entry should be done carefully. Indeed this pattern can give you a signal that the price will turn towards Bullish, so you can open a Buy position. But one thing to remember, opening a position without another confirmation (at least waiting for the third candle to appear) is not recommended in forex trading. Prudence, discipline in following a trading plan, and risk management are far more important than pursuing mature entries without careful calculation.

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