Like I said in the previous article, there are five candlestick patterns that look similar. The On-neck line pattern, meeting line pattern, in-neck line pattern, and thrusting pattern are covered in previous articles already. This article is about the Piercing line candlestick pattern.
Since these patterns look almost identical, it is confusing for a beginner why one pattern is a reversal signal but another two are continuation patterns. This has to do with the psychology of investors that each pattern reflects.
The Piercing Line candlestick pattern is a bullish reversal. According to the book Think, Trade, and Grow Rich, this pattern works 70% of the time. That is a pretty high accuracy rate.
This is how to spot a Piercing Line candlestick pattern.
1) Like in all the patterns we are going to discuss, the long-term trend (1-year trend) should be in an uptrend. There is very little chance to succeed if the long-term trend is against your favor. Remember, it is difficult to swim against the tide. Our job as technical chart readers is to wait for the right time when the tide itself is going where we want to go.
2) The intermediate-term trend (3 months trend) should also be preferably bullish.
3) There should be a minor correction or a pullback. Remember, as a trend follower, a minor pullback after a bullish upswing is the best time to enter.
4) While in this minor correction or pullback, a long bearish candle forms in the downtrend.
5) The second candle is bullish (green) and extended. The open is below the first candle’s close. The green candle then closes above the mid-point of the previous candle’s real body. This is also how the candle got its name. The second candle “pierces” above the body of the first candle even after opening lower than the previous candle’s closing price.
The rationale behind this pattern:
The formation of a green bullish candle is a bullish signal. The bulls were able to defy the ongoing trend and raise the price by buying. The second candle being able to close above the first candle’s midpoint means that the bullish aggression is strong enough to bring about a reversal of a trend.
This is why the Piercing Line candlestick pattern is called a bullish reversal pattern.