Piercing Candle Pattern Explained (real chart examples)

Piercing Candle Pattern Explained (real chart examples)
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The Piercing Pattern is a candlestick chart pattern which signals a potential reversal in the market. In this article we will show you how to identify it in the right market position with real chart examples. We also include a link to a free MT4 indicator download.

The Piercing Candle Pattern is a two candle pattern which signals a potential reversal in the market. The Pattern is Bullish and should be identified as a signal when occurring in an down-trending market or at the bottom of a range.

Piercing Candle Pattern Criteria:

  • The first day of this two candlestick pattern is a strong red (bearish) real body.
  • The second candle opens below the prior session’s low; that is, below the bottom of the lower shadow (gaps lower).
  • By the end of the second candle’s session, the market closes near the high of the day and well within the prior day’s red body.
  • The greater the degree of penetration into the previous real body the more likely a bottom will occur.
  • The reversal should be more than a 50% penetration of the second candle’s real body into the previous candle’s real body.

Additional notes:

  • This signal is more significant when the candles that form it are relatively large in the real body range and have relatively short shadows.
  • If the green candlestick does not close above the halfway point of the red candlestick then this would not be a valid signal (unlike dark cloud cover).
  • This pattern is preferred as a signal to exit short positions more than as a signal to buy the market.
  • A bullish engulfing pattern would be a more bullish signal than the Piercing Candle pattern. (You can read more about Engulfing Candle Pattern in our article: Engulfing Candle Pattern Explained).

Quick Reference Guide – Candlestick Basics. If you need a reminder of what candlesticks are have a look at our free PDF – Candlesticks Explained.

The criteria and examples above are just the technical definitions of this pattern. However patterns are only useful with context and with real chart examples.

No pattern will ever exactly match the criteria and in order to be a useful signal must occur in the correct place in a trend. Let’s start by looking at the classification table for this pattern.

Piercing Candle Pattern Classification Table

Number of Candles In Pattern 2
Type: (Reversal/Continuation) Reversal
Bullish/Bearish/Indecision Bullish
Market Conditions: Range, Down-trend, Up-trend Down-trend, Range
Position: Top, Bottom, Range Bottom

What Price Action Does The Piercing Pattern Represent?

All candlestick patterns are formed by price action. But the popular ones represent price action that may have significance in signalling the direction of the market.

The Piercing Candle Pattern forms when a market initially looks bearish via a gap lower from the previous close and then fails to break lower and instead rallies higher and closes significantly above the previous candles close (at least above the 50% line of the real body).

This can signal that a down-trend has run out of steam and that the bears tried and failed to push the market lower. This is why this pattern is better used when seen at the end of a prolonged down-trend.

If, on the opening of the second candle, there is very high volume, a selling blow off could have occurred. For example, heavy volume at a new opening low could mean that many new sellers have decided to enter the market.

The market then reverses and rises, leaving many trapped traders. This can quickly lead to those trapped traders closing out their positions, further pushing the market up. This can then be a signal for those that have ridden the down-trend to decide to close out, further increasing the upward momentum.

This is why this signal is often preferred as a signal to exit a short position rather than as a signal to buy the market. In terms of a bullish signal it is less bullish than a full bullish engulfing candle.

Hint: It is always good practice to look for confirmation for any signal that you are looking to trade.

Piercing Pattern Example With Confirmation

If the second body of the Piercing Candle Pattern opens below a major resistance level and then fails to fall further, it could prove that bears were unable to take control of the market.

In the example below of the US30, the market was down-trending. The market reached support at a round number level and the Piercing Candle Pattern formed. The candles forming the pattern were relatively large compared to the preceding candles.

The relatively large candles and the closure of the second candle well above the 50% midpoint of the previous candle formed a strong Piercing Candle Pattern formation.

In addition, the pattern coincided with a key area of resistance as it found support on the round number level.

This confirmation can help the trader to feel more confident in the signal and the potential for a good trade or to exit their short trade from the downtrend.

Piercing Candle Pattern Example on a Key Level
Piercing Candle Pattern Example on a Key Level

Note: you can get a free round level indicator for MT4 from us here: Round Levels MT4 Indicator.

In What Market Conditions Does The Piercing Pattern Become A Signal?

The Piercing Candle Pattern can be seen as a potential signal when it occurs in a prolonged down-trending market and is best as a signal to exit the down-trend.

It can be used in a ranging market if it occurs at the bottom of a trading range but is a weaker signal and should be followed by further bullish confirmation. Let’s look at a couple of real chart examples.

Piercing Candle Pattern In A Ranging Market

A ranging market is one where the price action moves up and down between two sets of support and resistance. This is also known as a sideways or horizontal market. In essence the price action is struggling to break out of the range decisively either on the upside or downside.

Ranging Market Example
Ranging Market Example

As you can see in this example of the US500 the market was in a period of consolidation forming a range. The market then attempted to break the range to the downside with a strong bearish push lower.

However, the market rejected the bears and a Piercing pattern formed. The market then moved back up and reasserted the range.

Piercing Candle Pattern Example in a Ranging Market
Piercing Candle Pattern Example in a Ranging Market

Piercing Candle Pattern In A Down-Trending Market

A down-trending market is one where the price action generally moves down over time and is characterized by lower lows and lower highs.

Down-trending Market Example
Down-trending Market Example

As you can see in this US500 example below, the market was down-trending and then the Piercing Candle Pattern occurred at the bottom of the trend. The market reversed and went higher.

Piercing Candle Pattern Example in a Down-trending Market
Piercing Candle Pattern Example in a Down-trending Market

Piercing Candle Pattern MT4 Indicator Download (free)

If you trade using MT4 then why not try out our free MT4 indicator? The indicator will scan the market based on the criteria shown in this article and identify them on the chart.

There is also an alternate version which can show the signal in a separate indicator window of the chart if that is your preference.

To download either or both, follow this link to the Piercing Pattern MT4 Indicator.

Important Information About Candlestick Patterns

Attribution:

All of the candlestick patterns that we explain on NothardTrading.com must be attributed to Steve Nison and his books on candle charting, the most famous of which was Japanese Candlestick Charting Techniques (Amazon). You can also find out more at his website here.

Interpretation Of Candle Patterns:

It is important to note that these patterns were originally identified on the daily timeframes of index charts, which is still where they are the most useful. However, this does not mean that they cannot be used for other markets or time frames.

No signal is perfect and should never be used as such. Any patterns that you identify only signals a potential move based on the fact that history repeats itself and forms regular patterns in similar situations.

But past performance is no guarantee of future results! So always treat these patterns with care and think of these guidelines when using them.

Best practice guide for trading of candle patterns:

  • No pattern is ever perfect. Be aware that patterns will form slightly differently each time and in different markets.
  • Use them as consistently as possible. Even though you will never find patterns exactly the same, you should always implement a consistent ruleset when identifying and using patterns.
  • It is never a guarantee, only an indication.
  • Make sure you are using it in the right context. For example if it is a continuation pattern then don’t use it to trade reversals!
  • Use multiple signals (confirmations) to have more confidence in your trading.

Related Patterns

Dark Cloud Cover Pattern Candle Pattern

The Dark Cloud Cover Pattern is seen as the opposite of the Piercing Pattern. It is seen as a bearish reversal pattern. To read our article about this pattern click here: Dark Cloud Cover Pattern Explained.

In Neck Pattern Candle Pattern

To learn more about In Neck Candle Pattern, see our article here: In Neck Candle Pattern Explained.

On Neck Pattern Candle Pattern

To learn more about On Neck Candle Pattern, see our article here: On Neck Candle Pattern Explained.

Bearish Thrusting Pattern Candle Pattern

To learn more about Bearish Thrusting Candle Pattern, see our article here: Bearish Thrusting Candle Pattern Explained.

More About Candlestick Patterns

If you are interested in reading more about candlestick patterns you can find our articles on this topic here: https://www.nothardtrading.com/category/candle-patterns/ or choose a pattern below to read more. 

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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