The piercing line is a bullish reversal candlestick pattern that signals a potential end to a downtrend. When this two-candle pattern appears at the bottom of a decline, it suggests that buyers are stepping in and a reversal may be starting. In this guide, we will cover how to identify, confirm, and trade the piercing line pattern.
What is the Piercing Line Pattern?
The piercing line is a two-candlestick bullish reversal pattern that forms after a downtrend. It is the bullish counterpart to the dark cloud cover pattern. The name comes from the second candle "piercing" into the body of the first candle.
Pattern structure: The first candle is a strong bearish (red) candle continuing the downtrend. The second candle opens below the first candle's low (gap down) but closes above the midpoint of the first candle's body, piercing into it.
How to Identify the Piercing Line
To properly identify this pattern, look for these specific characteristics:
- Prior downtrend: The pattern must appear after a clear downward move
- First candle: A long bearish candle showing strong selling momentum
- Gap down open: The second candle opens below the first candle's low
- Bullish close: The second candle closes above the midpoint of the first candle
- Penetration depth: The deeper the second candle penetrates, the stronger the signal
Why the Piercing Line Works
The psychology behind this pattern explains its effectiveness:
- Day 1: Bears are in control, pushing prices lower with confidence
- Day 2 open: Bears continue overnight, causing a gap down at the open
- Day 2 close: Bulls overwhelm bears, pushing price up significantly
- Result: Short sellers are trapped, creating buying pressure as they cover
Piercing Line Example
Stock ABC is in a downtrend at $30. On Monday, it drops from $30 to $26 (strong red candle). On Tuesday, it gaps down and opens at $25, but buyers step in, pushing the price up to close at $28.50. Since $28.50 is above the midpoint of Monday's candle ($28), this forms a valid piercing line pattern.
How to Trade the Piercing Line
Entry Strategies
- Aggressive entry: Enter long at the close of the second candle
- Conservative entry: Wait for a third candle to confirm by closing higher
- Pullback entry: Wait for a small dip to the second candle's midpoint area
Stop Loss Placement
- Place your stop loss below the low of the pattern (the second candle's low)
- This level represents the point where the pattern would be invalidated
Profit Targets
- Target 1: The high of the pattern formation area
- Target 2: Previous resistance levels
- Target 3: 1:2 or 1:3 risk-reward ratio from entry
Confirmation Signals
Increase your probability of success by looking for these confirmations:
- Volume: Higher volume on the second candle adds conviction
- Support level: Pattern forming at known support is more reliable
- Oversold RSI: RSI below 30 supports the bullish reversal
- Third candle: A bullish third candle confirms the reversal
Piercing Line vs Similar Patterns
Piercing Line vs Bullish Engulfing
The bullish engulfing pattern is stronger because the second candle completely engulfs the first candle's body. In the piercing line, the second candle only penetrates past the midpoint. Both are bullish, but the engulfing pattern typically leads to larger moves.
Piercing Line vs Morning Star
The morning star is a three-candle pattern with a small-bodied middle candle. The piercing line is a two-candle pattern. Both signal bullish reversals, but they have different structures and reliability levels.
Common Mistakes to Avoid
- Insufficient penetration: The second candle must close above the midpoint of the first
- No prior downtrend: The pattern needs context; it must follow a downtrend
- Ignoring volume: Low volume patterns are less reliable
- Trading in isolation: Always consider support/resistance and other factors
Pro tip: The deeper the penetration of the second candle into the first candle's body, the more bullish the signal. If the second candle closes near the open of the first candle, it is an especially strong reversal signal.
Real-World Trading Example
Complete Piercing Line Trade
Stock XYZ has been declining for two weeks and reaches a support level at $40.
- Day 1: Large red candle from $44 to $40
- Day 2: Opens at $39, closes at $42.50 (above midpoint of $42)
- Entry: $42.75 on third day open
- Stop loss: $38.75 (below day 2 low)
- Target: $48 (previous resistance)
Risk: $4.00 | Reward: $5.25 | R:R: 1.31:1
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Summary
The piercing line is a reliable bullish reversal pattern that forms when a strong downtrend is met with sudden buying pressure. The key requirements are a prior downtrend, a gap-down open on the second day, and a close above the midpoint of the first candle. Use confirmation signals like volume, support levels, and follow-through to increase your trading success.
Want to learn the bearish counterpart? Check out our guide on the dark cloud cover pattern or explore the abandoned baby pattern.