- This formation is only formed during downtrends.
- The first candle is always a big black candle (bearish).
- The next candle should open below the low of the black candle.
- The white candle of the next period should close at least above the midpoint of the real body of the black candlestick.
Piercing Line Pattern Interpretation
During a downtrend, sometimes the last day opens with a price gap with respect to the close of the previous session (the current session opens with a minimum price below the previous black candle, including its lower tail). In this case the buyers are cornered, but in a moment of truce between sellers and buyers in which both forces are equalized, buyers gain momentum and start buying hard, and sellers end up being overcome. This causes the price begins to rise strongly and anticipates a possible change in trend.
An important point is that the lower the opening of the white candle and the more deeply penetrate this candle within the body of the black candle, more valid will be the change from bearish to bullish trend. Also the trader should remember that for this pattern to be valid the white candle should open below the previous session low and should close at least above the midpoint of the body of the black candle of the previous period.
In case the white candle opens below the black candle close but above its lower tail, it is considered that the formation is imperfect, however it can be validated in case the candlestick closes above the midbody of the black candle, because with this the trend change condition is clearly fullfilled. This pattern is more reliable when it occurs in a support or on another important level rather than on a minimum itself. In this case, a Fibonacci retracement, pivot point or trendline can also reinforce the validity of this pattern. If this pattern occurs outside a support then the chartist traders consider that it is forming a support by itself.
If the white candle closing occurs below the midpoint of the black candle body of the previous period, then we can consider that the pattern loses strength and therefore it will not have the same reliability and consistency (See Meeting Lines Bullish Pattern).
In this case the opposite pattern to the Piercing Line is known as Dark Cloud Cover which indicates a possible change from bullish to bearish trend.
With respect to reliability, some analysts say is rather moderate, however if the Piercing Line meet all the conditions specified at the beginning, we can say that it has a high reliability.
Example of the Piercing Line pattern
Japanese traders have found that candlesticks form interesting patterns in the seeming market chaos.
These candlestick patterns are LEADING indicators and they can be used to make a profit if used correctly and effectively.
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