A piercing Signal pattern is a technical trading signal that is formed by a closing down day with a good-sized trading range, followed by a trading gap lower the following day with a green candlestick that covers at least half of the upward length of the previous day’s red candlestick body, finishing with a close higher for the day. A piercing pattern often signals the end of a small to moderate downward trend.
Piercing Pattern is a reversal candlestick pattern which is bullish in nature and appears at the end of a down trend. It is a complex pattern made of two candlelines. The first candle is bearish in nature and the second is bullish in nature. It has its name because the prices pierces up through the falling market. It is one of the important pattern, which you should give attention.
Formation of Piercing Signal Pattern
Piercing pattern is formed by the combination of two candlesticks. The first one is a falling red candle and the second is the reversal green candlestick.
The market is in a down trend. The price opens at almost high of the day and as usual the sellers continue to sell. At the end of the session the price closes almost at the bottom for the time period. This results in the formation of bearish red candle, which is the first candle of the piercing candlestick pattern.
On the next day or next time period the price opens below the low of the previous bearish candlestick. Sellers are making new short trades. Those who are already short in the market are also adding to their position. But the smart money creeps in starts accumulating shares from these ignorant sellers. As the demand increases the momentum decreases and the prices starts rising. As the prices rises the bears are happy to sell more at a higher price. This facilitates bulls to accumulate more shares at lower price.
The demand continues to increase more than the supply, pushing the price up. As the new short sellers are all in loss, they also start to buy back to minimize their losses. Sensing the change in the trend, the old bears starts booking profits in their short positions. As the bulls continue to increase their long position, the price rise further and at the end of the session the price closes above the opening. This results in the formation of bullish green candle, which is the second candle of the piercing pattern.
In order for the Piercing signal to be valid, the following conditions must exist:-
- The stock must have been in a definite downtrend before this signal occurs. This can be visually seen on the chart.
- The second day of the signal should be a green candle opening below the low of the previous day and closing more than half way into the body of the previous day’s red candle.