The Piercing candlestick pattern is a bullish reversal pattern. It forms once the market has the strong bearish move, the next day market opens with a gap down, and the price close within the previous day’s body. It shows that market has downward momentum but couldn’t hold the price down to the previous candle. It shows the seller strength is weaker and the buyer has taken control of the market.
Piercing Candle Formation
The first indication of a piercing candle is, it opens with a gap down price. It pushes the price up and the final candle will look like a Green Bullish candle. Piercing is opposite to a dark cloud candle. The piercing candle closed within 50% of the previous day’s candle. This triggers a strong bullish momentum and prices usually change their polarity to a bullish outlook.
With advance candlestick calculation, if we combine the piercing candle with the previous day candle, it gives us result as hammer candle. The below example shows, how a piercing candle is actually a hammer candle but we can only figure this out if we know the advanced candlestick calculation.
GBPUSD Piercing Candlestick Example
The following picture shows a GBPUSD daily chart. the market opened with gap down price 1.33112. Previous day candle closing price was 1.33175. This candle was closed as bullish Green candle and formed piercing candle. As we can see the market changes its direction to bullish and prices started moving up.
How to Trade piercing Candlestick Pattern
Since now we understood the formation and pattern. Let’s learn how to trade the piercing candlestick. First, the market will open the gap down, as shown in the example below.
we waited for market to close within the previous candle, and formed a bullish green candle. As mentioned earlier, want the bullish candle to close at least 50% of the previous candle. We noticed the candle closed just below the 50% line. We will wait for the next day’s market to close above the 50% mark.
As shown in the picture, in addition to above, the next market closed above the 50% mark and that gave us buy signal. We will place pending buy limit order at the close of the previous candle with stop loss at the very low of the piercing candle.
Similarly, we noticed the 3rd day, our entry was trigger and traders should have made a decent profit on that trade!