The piercing line is a two-candle bullish reversal pattern that appears at the bottom of downtrends. It shows that buyers are aggressively entering the market and driving prices back up through the previous day's losses. When identified correctly at key support levels, the piercing line can signal excellent long entry opportunities.
What is a Piercing Line Pattern?
A piercing line consists of two candlesticks: a bearish candle followed by a bullish candle that opens below the previous low but closes above the midpoint of the previous candle's body. The pattern shows a dramatic shift from selling pressure to buying pressure.
Key requirement: The second candle must close above the 50% level of the first candle's body. This piercing of the previous candle shows that buyers have truly taken control. If it closes below the midpoint, the pattern is not valid.
Piercing Line Requirements
For a valid piercing line pattern, these conditions must be met:
- Must appear after a clear downtrend
- First candle is a large red (bearish) candle
- Second candle opens below the first candle's low (gap down)
- Second candle is green (bullish)
- Second candle closes above the midpoint of the first candle's body
- Second candle does not close above the first candle's open
Piercing Line Example
Stock ABC has dropped from $50 to $40 over two weeks.
- Day 1: Red candle, opens $42, low $39.50, closes $40
- Day 2: Green candle, opens $39 (below Day 1 low), closes $41.50
- First candle midpoint = ($42 + $40) / 2 = $41
- Second candle closes at $41.50, above the $41 midpoint
- Pattern is valid: Bullish reversal signal
The Psychology Behind Piercing Line
Understanding the psychology helps explain why this pattern works:
Day 1: Continued Selling
The downtrend continues with a large bearish candle. Sellers are in control, and bearish sentiment remains strong. The large red candle reinforces the negative outlook.
Day 2: Dramatic Reversal
The market opens even lower, creating a gap down. This initially looks extremely bearish and may cause panic selling. However, buyers see value at these low prices and begin aggressive buying. Throughout the session, buying pressure overwhelms selling pressure, driving prices up through the previous day's midpoint. By the close, buyers have reclaimed more than half of the previous day's losses.
Piercing Line vs Bullish Engulfing
The piercing line and bullish engulfing are similar patterns, but there is an important difference:
Pattern Comparison
- Piercing Line: Second candle closes above 50% but below 100% of first candle body
- Bullish Engulfing: Second candle completely covers and exceeds the first candle body
- Signal strength: Bullish engulfing is the stronger signal
- Interpretation: Piercing line shows strong buying, engulfing shows overwhelming buying
How to Trade Piercing Line Patterns
Entry Strategies
Conservative Entry
- Wait for the second candle to close
- Enter on a break above the piercing line high
- Lower risk of false signal
Aggressive Entry
- Enter near the close of the second candle once the pattern is confirmed
- Better entry price but higher risk
- Requires quick decision-making
Stop Loss Placement
Place your stop loss below the low of the pattern (the low of the second candle, which is also below the first candle). This level represents the invalidation point for the bullish thesis.
Profit Targets
- Target 1: Previous swing high or resistance level
- Target 2: Measured move equal to the pattern height
- Target 3: Fibonacci extension levels
Factors That Strengthen Piercing Line
- Deep piercing: The higher the close above the midpoint, the stronger the signal
- Large gap down: A bigger opening gap shows more dramatic reversal
- Volume increase: Higher volume on the second candle confirms buyer commitment
- Support level: Patterns at key support areas are more reliable
- Oversold conditions: RSI below 30 adds confirmation
Real Trading Scenarios
Scenario 1: Piercing Line at Trendline Support
A stock has been trending higher with higher lows. During a pullback, price touches the rising trendline and forms a piercing line pattern. The combination of trendline support and the bullish candlestick pattern creates a high-probability long setup with clear stop placement below the trendline.
Scenario 2: Piercing Line at 200-Day Moving Average
A quality stock falls toward its 200-day moving average during market weakness. A piercing line forms right at the moving average. Institutional buyers often defend this level, making it an ideal location for the pattern to work.
Scenario 3: Piercing Line with RSI Divergence
A stock makes lower lows while RSI makes higher lows (bullish divergence). A piercing line at this point has extra significance because multiple indicators are aligning for a bullish reversal.
Common Mistakes to Avoid
- Close below midpoint: If the second candle does not close above 50% of the first body, it is not a piercing line
- No prior downtrend: The pattern requires a downtrend to reverse
- Missing the gap: The second candle should gap down below the first candle low
- Ignoring confirmation: Wait for follow-through buying before committing
- Wrong timeframe: Piercing lines on very short timeframes are less reliable
Piercing Line in Different Markets
Stocks
Piercing lines work well in stocks because overnight gaps are common. The gap down followed by reversal is clearly visible on daily charts.
Forex
In 24-hour forex markets, true gaps are rare except over weekends. Look for modified piercing patterns where the second candle opens near the first candle close rather than gapping down.
Cryptocurrencies
Crypto markets trade 24/7, so gaps are also rare. However, the pattern concept still applies when there is a sharp move lower followed by strong reversal in the same session.
Combining with Technical Indicators
- RSI: Piercing line with RSI below 30 is a stronger signal
- Bollinger Bands: Pattern at the lower band adds confluence
- MACD: Bullish crossover confirmation strengthens the signal
- Volume: Above-average volume on second candle confirms buying
Analyze Your Piercing Line Trades
Pro Trader Dashboard helps you track and analyze trades by pattern type. See your win rate on piercing line setups and identify what separates winners from losers.
Summary
The piercing line is a powerful two-candle bullish reversal pattern that appears at bottoms of downtrends. The key requirement is that the second candle must close above the midpoint of the first candle's body after gapping down below its low. Look for piercing lines at support levels, confirm with volume and other indicators, and use stops below the pattern low for proper risk management.
Learn the bearish counterpart in our dark cloud cover guide or explore engulfing patterns.