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The Forex Piercing Line Candlestick Pattern

The Piercing Line Candlestick Pattern - What is it?

Piercing Line Candlestick Pattern - What is it?

The huge array of various approaches accessible to traders is one of the reasons why technical analysis is still such a popular method of studying and trading the markets. Traders can experiment and modify approaches until they discover one that works for them, from reading raw price action to chart patterns and indicator analysis. 

We’ll talk about a crucial forex candlestick pattern in this post. We’ll look at how to spot the Piercing line candlestick pattern and how to trade it.

Candlestick Reading

Candlestick reading is one aspect of technical trading that offers a diverse and intriguing array of alternatives. The fundamental element of technical analysis is candlestick reading. There are several possibilities for candlestick reading, ranging from individual candlestick analysis to complicated candlestick patterns. In this post, we’ll look at the piercing line pattern, which is a type of mid-level candlestick formation.

However, before we get into this pattern and how to trade it, let’s make sure we’re all on the same page about candlestick reading and why it’s so essential to traders.

Why Are Candlesticks so Important?

Candlesticks are a common technique to show price data on trading charts. They’re so popular because they offer a rapid visual overview with a lot of useful information.

Candlesticks are a fantastic tool for observing what’s going on with the market’s underlying order flow. Candlesticks, at their most fundamental level, tell us four things about the price movement during that session. The open, the high, the low, and the close are all terms that are used to describe the price of a stock. 

A red candle also indicates that the price completed the session lower than it began, while a green candle indicates that the price ended the session higher than it began.

Along with that fundamental information, candlestick shape and size reveal a lot about the underlying order flow movement during that session. A huge green candle, for example, indicates that there was a lot of purchasing that day because the price closed significantly higher than it began.

 A huge red candle, on the other hand, indicates that there was a lot of selling that day because the price closed significantly lower than it started.

Now that we have a solid grasp of what individual candlesticks are telling us about underlying order flow movement, we can progress to looking at what combinations of candlesticks, or candlestick patterns, are indicating to us about the market and construct a trading idea from there. Let’s look at the piercing line pattern now, without further ado.

Candlestick Pattern – Piercing Line Example

 
 
Bullish Piercing Line Candlestick Pattern Example

The following chart shows a bullish piercing line pattern. Following a bearish candle, the next candle (a bullish candle) gaps lower (opens below the previous candle’s close) and then closes above the 50 percent retracement of the previous (candle closes over the bearish candle’s midpoint). A two-candle pattern is the forex piercing line candle formation.

That’s all there is to it; it’s pretty easy to detect. This piercing line chart pattern is essentially showing a major shift in market mood for us. As a result, we know that sellers were in charge at first, forcing prices lower throughout the bearish candle. 

The price then gaps lower on the next candle, indicating that the selling has become more intense.

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Buyers stepped in, in force at the bottom of the following candle, driving the price rapidly higher to the point where it closed above the midpoint of the previous candle. This indicates a significant shift in attitude and warns us of the possibility of further gains, providing buying opportunities.

Example of a Bullish Piercing Line Pattern

 
Bullish Piercing Line Pattern

So, you can see a very obvious illustration of this pattern on the charts in the image above. Price is initially moving in an obvious decline, with a bearish candle forming near the move’s lows. Price gaps lower on the following candle (opening below the preceding candle’s low) before buyers jump in and price reverses higher. Our piercing line candle pattern is confirmed when this bullish candle closes above the midpoint of the previous candle.

The Piercing Line Pattern And How Do I Trade It?

So, if the price breaks above the high of the bullish candle and our stop moves below the bottom of that entry candle, we can place a buy order. Then, to achieve a favorable risk-reward ratio, we aim for an objective that is at least twice our risk.

This pattern’s appeal is that it serves as an early warning indicator of a possible bullish reversal. Furthermore, because the market is trending lower at the time the pattern occurs, this trade idea would not come to you unless you are educated in candlestick reading and are familiar with this pattern. As a result, it may be a terrific approach to get a unique market entry point that only a few traders are aware of.

One of the most appealing aspects of candlestick reading is this. You will frequently find that you are able to obtain a better entry point to a move because you are learning to evaluate the raw price action itself and what it is indicating to you about the underlying order flow in the market.

If you’re looking at a bearish trend and waiting for the price to break above a trend line in order to strike a bullish reversal trade, for example, you’ll often discover that you’re getting in late. Learning to understand candlestick patterns like this one, on the other hand, allows you to be far more responsive to and in tune with market developments.

Knowing this pattern can help you decipher the market’s underlying order flow movement. We may build a buy position based on a strong trading assumption by understanding the shift that must have occurred in order for this candlestick pattern to appear. And we’ll be able to do so quite soon.

 This provides us a considerably tighter stop, which implies that if we choose to leave our trade open, we may potentially earn a much larger profit if we use a trailing stop strategy.

We may now try to exploit this pattern in conjunction with other technical features, rather than just trading it as a stand-alone method. The convergence of technical approaches is one of the most effective ways of studying and trading the market since it increases our chances of success with our trade idea.

The pattern of Piercing Lines with Indicators

In order to identify if this is in fact a bullish reversal pattern, we’ll look for it in locations where a positive signal would be expected, such as near support levels, broken resistance, or even a bullish trend line. Technical indications, on the other hand, can be used to determine confluence. This pattern has a much higher chance of success when we combine a bullish signal from a technical indicator with our piercing line patte