The piercing line pattern is a rare but useful bullish reversal formation. This article explores what the pattern shows, how it works, and how to use it.

The piercing line is a candlestick pattern that can help traders identify and trade upcoming bullish reversals. Although it’s somewhat rare, when used in a broader analysis toolkit, it is a very valuable technical analysis tool. This article explores the piercing pattern, how it forms, and how traders implement it into their trading strategies.

What Is the Piercing Line Pattern?

The piercing line, also known as the piercing pattern, is a two-candle bullish reversal setup that appears during a downtrend. It’s made up of:

1. A strong bearish candle that shows heavy selling.
2. A bullish candle that opens lower but then closes at least halfway up the body of the first candle.

That close above the midpoint is key. It indicates that, despite a gap down, buyers were able to recover well into the previous candle. The gap down traps sellers just before buyers step in aggressively. The second candle should have a solid body and close well into the previous range; the deeper it pushes into the bearish candle, the more momentum it shows.

The piercing candlestick pattern is most common in stocks, where gaps between open and close prices are frequent, though it can sometimes be identified in other asset classes like forex or commodities. It may also be more frequently seen on higher timeframe charts, like the daily, given the gaps commonly found between trading sessions.

What is the opposite of the piercing line pattern? The opposite is the dark cloud cover, which is a mirror-image bearish reversal pattern that forms during an uptrend. It’s effectively a bearish piercing pattern.

The Psychology Behind the Piercing Line

The bullish piercing pattern can show a sharp shift in control, particularly on higher timeframes. Sellers dominate on the first candle, closing near the lows and keeping pressure on. Then, the market gaps lower, which looks like more downside, but buyers respond. That early strength of sellers dissipates, and by the close, the price pushes deep into the previous candle’s range.

This catches sellers off guard. Some exit quickly, adding to the upside push. Others hold on, but the strong close to the midpoint or more signals that momentum might be turning as buyers commit and build long positions.

How Traders Use the Piercing Line Pattern

While the piercing line’s candlestick formation is valuable, it’s relatively rare. To make the most of its signals, traders read the story behind the candles and see if it fits into a bigger setup.

Contextual Factors

Most traders look for the piercing line’s candles near support levels, major swing lows, or in areas where the market looks oversold. It’s believed to be more effective when there’s a reason for buyers to step in, such as a key price level that’s been maintained in the past, a notable round number, or an extreme reading on an oscillator like the RSI or Stochastic.

It may also hold more weight if the trend structure is supportive. For instance, if the pattern forms in a broader uptrend just as the price pulls back, it’s more convincing. After a prolonged downtrend, traders might look for more confirmation.

Waiting for Confirmation

The piercing pattern’s candlesticks are a signal but not a certainty. Traders often wait to see how the next one or two candles behave. If the market starts pushing higher, especially with strong upward candles or a bullish continuation pattern (such as another upward gap, breakaway gap, or bullish engulfing candles), it adds strength to the signal. If the price stalls, that can be a warning sign. Dropping below the pattern invalidates it.

Many traders will also combine it with other tools that confirm a shifting trend. If the pattern coincides with two moving averages crossing over, the RSI/Stochastic exiting oversold levels, or much higher volume on the bullish candle than the first down candle, that might act as additional confirmation.

Entering and Exiting

Once a trader is happy with the setup—they are confident a reversal is underway with additional confirmation found—they’ll typically go long.

Some might choose to enter on the close of the second piercing candle if they have enough confirmation. Others may choose to wait for additional candles at the cost of a potentially worse risk/reward ratio but with higher certainty.

Stop losses might be set below the low of the pattern’s bullish candle, with the expectation that it’ll be the final swing low before a reversal. Below this point, the downward movement is likely to continue.

Take-profit targets could be placed at an area where traders expect a bearish reversal, such as a key resistance level. Alternatively, they might exit when an indicator or pattern shows a potential bearish movement is inbound. Some might simply choose to exit at a predefined risk/reward ratio, such as 1:2 or 1:3.

Example Trades

Let’s now explore the piercing on charts. In the example above, we see Tesla (TSLA) moving downwards. The market closes firmly into a previous resistance level, which now acts as support. On the second bullish piercing candle, buyers bid the stock aggressively, resulting in a candle that closes above the midpoint of the first bearish one on higher volume. At the same time, the MACD indicator shows a bullish crossover and divergence, helping to reinforce the idea.

While the downward trend resumes eventually, the setup offers a potential opportunity to take advantage of a bounce from support as it occurs on a daily chart.

In the example on the JPMorgan Chase & Co. (JPM) chart, a similar scenario appears. JPM hits a higher timeframe support level after a sustained downtrend, and a piercing line appears, albeit on lacklustre volume. However, it is supported by a diverging RSI.

However, the next trading day strongly supports the idea. JPM spikes to hit its largest single day gain in four months, this time moving higher with a large bullish candle on decent volume. This is a clear signal the pattern is working and provides a valid setup supported by multiple confluence factors.

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Piercing Line Candlestick Pattern: Strengths and Limitations

Like most candlestick patterns, the piercing line has its place, but it’s only as good as the context around it. Here’s where it shines and where it falls short.

Strengths

• Clear structure: It has an easy-to-remember two-candle formation to quickly identify when scanning charts.
• Shows intent: The close through the midpoint reflects a clear push from buyers during a downtrend.
• Works well with support zones: It can help confirm a bounce off a major level, especially when other signals line up.

Limitations

• Needs confirmation: On its own, the pattern doesn’t guarantee anything. Without other bullish candles or technical indicators, confirming an upward movement, it’s just two candles.
• Not a common pattern: The piercing line isn’t a common pattern. Therefore, it may be difficult to find it on price charts.
• Can be misleading on lower timeframes: The pattern may show up more often on lower timeframes but carries less weight due to noise and randomness.

Comparison With Other Candlestick Patterns

The piercing line is part of a group of bullish reversal patterns. It shares similarities with a few others but has its own distinct characteristics that make it unique.

Bullish Engulfing

Both patterns signal a shift towards bullishness. The difference lies in the second candle. In a bullish engulfing pattern, the green candle completely covers the previous red candle’s body. With a piercing line, the second candlestick only needs to push past the midpoint. That makes the engulfing slightly more aggressive.

Morning Star

The morning star is a three-candle pattern. It starts with a bearish candle, followed by a small-bodied one (sometimes a doji), which can open with a gap down, then a strong bullish candlestick. It’s a more gradual shift in sentiment compared to the piercing line’s sharper move. Both suggest buyers are stepping in, but the morning star takes longer to form and signals hesitation between the moves.

The Bottom Line

When used in the right context, the piercing line can help traders participate in bullish reversals. Despite its relative rarity, it’s worth remembering and adding to a broader technical analysis arsenal, especially if trading stocks.

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FAQ

What Is a Piercing Line Pattern?

The piercing line is a two-candle bullish reversal pattern that appears during a downtrend. The first candle is bearish and closes near its low. The second candle opens lower but closes at least halfway into the previous candle’s body.

How Do Traders Use Piercing Lines?

Traders typically use the pattern alongside support zones, volume spikes, and confirmation signals from momentum indicators or moving averages. It’s common to wait for follow-through in the next few candles before acting. On its own, the pattern isn’t considered strong enough to rely on.

What Is a Piercing Strategy?

A piercing line strategy involves identifying the pattern at an area where a bullish movement is expected, like a support level, and then combining it with other tools like the RSI, moving averages, or trendlines to confirm the bullish signal. After that, traders might go long at the close of the second pattern’s candle or wait for 1-2 candles to be closed in the bullish direction. A take-profit target could be set at the next resistance level, or traders could exit the market as soon as an indicator or another pattern signals a bearish reversal, while a stop-loss order might be placed below the pattern.