Candlesticks, a major part of Stock Technical Analysis, compiles data from multiple time frames into single price bars. They further form patterns that predict the future price direction of an asset. A candlestick, as most of them know has four parts – Open, close, high, and low. Each candle tells a story. A candlestick can be best viewed as a war between buyers and sellers. A green candle indicates that buyers have won that period, whereas a red candle indicates the victory of sellers.
Traditionally, a Daily time frame is the best for candlesticks analysis. A daily candlestick captures a full day’s worth of data, price-action, and news in it. There are two types of candlesticks.
- Bullish Candlesticks
- Bearish Candlesticks.
Bullish Candlestick Pattern:
Bullish candlesticks pattern in Stock Technical Analysis indicates the start of an uptrend and the end of a downtrend. Morning star, bullish engulfing, hammer, etc. form Bullish Candlestick patterns.
Bearish Candlestick Pattern:
In Technical Analysis of Stocks, bearish candlesticks indicate the start of a downtrend and the end of a bull run. Evening star, bearish engulfing, hanging man, etc. are a part of Bearish Candlestick Patterns in Technical Analysis of Stocks.
What Is a Piercing Candlestick Pattern in Stock Technical Analysis?
A piercing candlestick pattern is a bullish candlestick chart pattern. This candlestick, used in Technical Analysis of Stocks is a potential signal for an upcoming bullish trend.
This piercing candlestick can form everywhere on the chart but is considered significant only if it forms after an extended downtrend. The formation of it in its strictest form is very rare but would perform best if its preceding downtrend is strong.
Along with piercing candlestick, technical indicators In Stock Market like RSI, MACD, bullish divergence, etc. indicate the strength of the candlestick.
Formation: The piercing pattern also called a piercing line is a bullish candlestick that is formed over a period of 2 days if viewed on a Daily chart. A piercing candle pattern has 2 components.
1. A bearish candle on Day -1
The bearish candle formed on day 1 should be having a large real red body.
2. A bullish candle on Day 2
The bullish candle formed on day 2 should open below the low of the Day -1 bearish candlestick. The close should be equal to or greater than 50% of the real body of the Day-1 bearish candlestick.
Since the closing price of the bullish candle (Day-2) pierces into the midpoint of the bearish candle, the name piercing pattern. The deeper it pierces, the more significant the piercing line pattern becomes.
- The piercing line pattern is a powerful pattern when formed at the end of an extended downtrend.
- If both the bearish and bullish candles formed respectively on Day 1 and Day 2 are Marubozu candlesticks, (candlesticks with no upper wicks or lower wicks) then the pattern becomes more powerful.
- The more the gap-down between the bearish and bullish candle sticks, the more powerful the trend reversal will be.
- More reliability for a piercing pattern can further be confirmed if occurs at the support trendline of a price channel.
- Down Trend
- Day 1 – Bearish candle.
- Day 2 – Opening Gap down.
- Bullish Candle
- Closing should be equal to or greater than 50% of the Day-1 bearish candle
Interpreting The Piercing Candle Pattern
The initial downtrend and the first bearish candle indicate that the bears are very much in control. The second candle, i.e., the green candle indicates that the bulls jumped in and rejected the gap-down. This can be viewed as a bullish sign. Despite the continuous selling pressure (gap-down) even at the start of the session, bulls were able to move up the prices further and with-hold them (prices) higher by winning over the overpowered bears.
This indicates absorption of excess supply and increased level of demand which further implies more bullish sentiment.
If you see, in the above picture, after an extended downfall, (downtrend), there is a piercing candle. The candle formed on Day 1 is a big red candle, whereas on the Day-2 the green candle, adhered to all the conditions of a piercing candlestick.
The same piercing candle is confirmed using bullish divergence in the above case.
Advantages Of Using Piercing Candlestick in Technical Analysis of Stocks:
- Easy to identify.
- Occurs frequently in all financial markets.
- Provides potential trading opportunities with favorable risk-reward ratios.
- Not powerful when used in isolation.
- Requires the confirmation of other technical indicators, signals, etc.
- The overall market trend must be taken into consideration.
- No proper defined set target.
Ideal Trade Set Up for Piercing Candle Pattern
The success rates are high on higher timeframes like 1 hour and 1day. Hence, this piercing candlestick is an ideal trade set-up for day trading and swing trading. Also, while taking a trade, it is important to check the signals of other indicators for confirmation.
Stop – Loss: In this two-candle stick pattern, the lowest point of the two candles is considered the stop-loss.
Opposite Of Piercing Candlestick Pattern:
The dark-cloud cover pattern in Technical Analysis of Stocks is the opposite of a piercing candlestick. It is a bearish candlestick, wherein a red (black/bearish) candlestick opens above the close of the prior bullish (green/white) candle and closes below the midpoint of the bullish candle.
Fun Fact: If the second candle, i.e., the green candle in the piercing line pattern rallies more and closes above the Day-1 bearish candle, then, this is termed a Bullish Engulfing pattern. A Best Stock Market Technical Analysis Course covers everything related to Technical Analysis of Stocks, which includes candlesticks, price-action, support, and resistance, etc. The Best Stock Market Institute in India teaches all the strategies but also tells not to mix all of them into a single chart. It also focuses on risk management, stop loss, position sizing and psychology. A technical analysis course emphasizes over practice and implementation over the charts. With right support and mentorship, all the problems of novice traders and investors are solved.