It’s time to learn how to trade the piercing pattern candlestick.
This formation is one of the most frequently occurring patterns on crypto charts.
You’ll find it on lower and higher time frames.
Therefore scalpers, swing traders, and long-term investors can use it.
There’s no single market for it.
Bitcoin, Ethereum, Matic, Shiba, Solana, Avalanche, and many other digital currencies’ charts feature this pattern.
As such, it’s worth knowing how to trade the piercing candlestick pattern like a pro.
This and many more are what you’ll find in this guide.
So work with me as I reveal its trading methods.
What is a Piercing Line Candlestick Pattern?
A piercing line is a double candlestick pattern found in downtrends.
Note that the term ‘line’ is just an old way of describing a candlestick.
The first candle of this pattern is a large red bar while the second candle is a not-so-large green bar.
However, the green bar opens below the first candle.
It also penetrates the red candle by about 50%.
And as such, it is piercing the first candle.
This shows that a large group of buyers have stepped into the market after a period of falling prices.
It’s even better since price might be at a key level such as support on a trend line or moving average.
This means that a piercing pattern is a bottom reversal pattern signaling long or buy entries into the market.
But there can be different variants of this formation.
The ideal version of the pattern is one where the green candle opens below the red candle.
The green candle also closes above the mid-point of the first candle.
This hints bears were unable to sustain lower prices given that price tackled the lows of both candles and succeeded.
The bullish candle even closed higher than it opened and deeply into the first bar.
Here’s an example on a EUR/USD 4-hour chart.
There was a need to switch to a Forex pair given how rare the ideal variant is on crypto charts.
Nonetheless, keep an eye out for when you spot it on Bitcoin, Ethereum, Solana, Shiba, etc. chart
Another variation of this formation is:
- The green candle does not close above the red candle’s mid point but still opens below the red candle.
Check the EURUSD 4-hour chart below for this variant.
You’d notice the pattern couldn’t reverse the trend since the green candle is significantly smaller than the red candle.
In some cases, this variant might reverse the trend but it just has a lower chance of doing so compared to an ideal piercing line.
Here’s another variant of this pattern.
- The green candle does not open below the red candle but still closes above the red candle’s midpoint. You’d mostly find this variant on crypto charts.
Here’s an example of the third variant described above on a Bitcoin/USDT 4-hour chart.
The bullish candle may have failed to open below the bearish candle but it still penetrated the latter significantly.
This shows the market is not as weak as it used to be due to the presence of aggressive bulls.
Similar Piercing Patterns
Do you know you’d sometimes mistake look-alikes for the piercing pattern?
These are still bullish formations but not very bullish due to the degree of penetration of the green candle into the red candle.
Here’s what I mean:
You could have an on neck, in neck, or thrusting penetration.
Let’s see what each of these entails.
1. On Neck:
An on-neck penetration is where the green candle lodges around the lows or wick of the red candle.
It opens near the lows and closes near the close of the red candle.
Don’t get confused.
Just think about it as a green candle that’s stuck in the preceding bar’s lower shadow.
2. In Neck:
An in-neck candle, on the other hand, opens near the lows of the red candle but closes slightly above the close of the bearish candle.
That’s a major difference.
It’s still a small candle like the on-neck pattern.
3. Thrusting Pattern:
The thrusting pattern is, however, peculiar to the first two mentioned formations.
It closes above the open of the red candle but not midway into the candle.
But then it’s larger in size compared to the on-neck and in-neck patterns.
What can you make out of this?
It’s a bit more bullish than the other two variations.
Generally, these three formations bear a close resemblance to the piercing pattern but are not really the formation.
What other candlestick patterns can you liken to the piercing line?
If you mentioned the bullish engulfing or bullish harami, then you’re correct.
Let’s take a look at both candles.
Piercing Pattern Vs. Bullish Engulfing
There’s a difference between the bullish engulfing candle and the piercing pattern.
This disparity is in the second candle and its size.
In an engulfing pattern, the second (green) candle completely covers the first (red) candle.
This is why the term ‘engulf’ is used in the first place.
In contrast, the green candle in a piercing pattern does not surround the red candle completely.
The Bitcoin/USDT 4-hour image below paints a perfect picture.
So, is a piercing line more bullish or less bullish than an engulfing candle?
It’s less bullish.
It shows that while buyers have stepped into the market, they have not absorbed all the selling pressure from the previous candle.
It’s one thing to be present in a place and it’s another thing to take charge fully.
Piercing Pattern Vs. Bullish Harami
The difference between a piercing pattern and a bullish harami lies in the size of the second candle.
A piercing pattern’s green candle is larger than that of a harami.
Therefore, the piercing line is a more bullish formation than the latter.
That’s because the buying pressure of that piercing green candle is stronger than that of the harami’s green candle.
How to Trade Piercing Pattern
If you’ve ever heard a candle’s size is important in analysis, here’s where you’ll need it.
You’ll be paying attention to the pattern’s color, size, and placement.
Here’s how to trade the piercing pattern formation on your chart.
- Spot the trend.
- Find the support level or zone.
- Discover the pattern.
- Take the trade.
- Set stop and profit targets.
1. Spot the Trend:
What’s the trend even before you begin searching for a bullish candlestick.
Is it an uptrend, downtrend, or sideways trend?
Read this guide on how to spot trends and their reversal.
Some would say the trend doesn’t matter but I believe you’ll be looking to buy using this pattern.
As such, it’s ideal to find it in a downtrend.
It’ll serve as a signal to go long after minor or major corrections.
Here’s a variation of a piercing candlestick in a downtrend on a Bitcoin/USDT 4-hour chart.
Price rallied from the $30,000 zone to the $32,000 area on the candle after the piercing line.
This formation could also be spotted in the corrective move of an uptrend.
The Bitcoin chart below is an example of a piercing line variation in the corrective moves of an uptrend.
Now it’s important to note that the trend may differ depending on the timeframe you’re making entries and exits.
Let’s say it’s an uptrend on the 1-hour timeframe and a downtrend on the 5-minutes timeframe.
What are you gonna do?
As usual, trade with the higher timeframe by waiting for price’s reversal into an uptrend in 5 minutes.
Check this guide to learn more about multiple timeframe analysis in crypto.
2. Find the Support Level or Zone:
A piercing pattern is a bullish reversal signal hinting that the minor trend or major downtrend is coming to an end.
As such, it’s best to watch out for this pattern around support levels or zones.
It’ll be a level on a lower timeframe and a zone on a higher timeframe.
You get to decide based on your trading timeframe.
Note that the support level could be on a horizontal or diagonal trendline.
For the former, pivot point strategy will make your work easier.
You won’t have to manually draw these levels since an indicator has done it for you.
I’ve already covered this strategy in another guide, so do well to check it also.
On the Bitcoin/USDT 1-hour chart below, the pivot indicator was used to outline support and resistance levels.
Price retested the support level and bounced off it on a piercing pattern. It traded from the $29,000 zone to the $30,000 region.
You could also wait for retests of moving averages such as the EMA 8, EMA 50, SMA 50, and SMA 200.
It isn’t a must that you use the aforelisted numbers in your EMA or SMA. These values are what I use and they work well with my trading strategy.
Note, I either use the EMAs or the SMAs and not both at the same time,
3. Discover the Pattern:
It’s time to spot the actual pattern.
Here’s what to do:
- Check if the green candle opened below the preceding one.
- Confirm if the green candle does not completely overwhelm the red candle.
The larger the green candle, the better.
This large size shows a large chunk of selling pressure has been absorbed.
Hence, it calls bears to order.
And remember, there can be variations of this pattern.
It’s not crafted on stone that you only take the trade because the green candle is over 50% larger than the red one.
It’s just better if it does since the trade could potentially reverse in the upward direction.
Another tip to keep close is the lower opening of the green candle. It’s just as important in an ideal piercing line candle,
Now that you have correctly spotted the pattern, what’s next?
Read the next section.
4. Take the Trade:
A fully formed piercing pattern is your cue to go long or buy.
It could be the spot or futures market, the same strategy is at play.
Now you’d actually long on the candle after the pattern.
But don’t be in a hurry!
Get a confluence of signals before taking the trade.
This confluence could be a bullish divergence of the RSI or MACD, a bullish crossover of the MAs or MACD, RSI above 50, etc.
The Bitcoin/USDT 15-minute chart below shows a variation of a piercing pattern.
Given that you’re out to find one more confirmation to take the trade, RSI crossing 50 would’ve been ideal.
In the image, you can see the cross came after a retest of the breached neckline.
So you’d go long or buy on the hammer candle.
If you rely less on indicators, it might help to spot a bullish candle or chart pattern on a higher timeframe.
5. Set Stop and Profit Targets:
You’ve taken the trade and risk management has to be in order.
Therefore, place a stop loss below the lowest low of the pattern (both candles).
Price’s failure to maintain the high of the green candle could lead to a retest of the lows.
And if that low fails to hold, the downtrend might continue not unless a false break or breakout occurs.
You’d know further decline is coming when the next candle closes lower than the first two candles.
You may also have to adjust your stop as price gets closer to your profit target.
This target could be the next pivot level, resistance, channel line, and so much more.
The same Bitcoin chart used in section 4 has been used in this example.
Given that the entry wasn’t made on the piercing pattern, using its lows as a stop might create a poor risk to reward.
As such, the stop can be placed on the lows of the hammer candle.
Potential profit targets are the previous lower highs since they’ll now act as resistance.
Reducing the Potential for a False Breakout on a Piercing Pattern
It’s entirely possible that the trade goes south after you’ve taken a long or buy position.
Your stop could be hit especially if it’s a very strong downtrend or highly volatile market.
But this false break or breakout can be avoided by paying attention to the following:
- Volume accompanying the pattern.
- Increasing open interest.
1. Volume Accompanying the Pattern:
You’d do well to check the volume on the creation of the second pattern.
If it’s on high volume, it shows that bears who’d gone short at the opening of the green candle are stuck.
The more the number of bears stuck at that level, the better.
And this high number is shown in high volume.
So, enable your volume indicator!
Increasing volume hints that these bears are now anxious for price to revisit the previous low because if it doesn’t, they’ll have to keep counting their losses or cut it.
The point is, that the smart bears may have placed their stop midway through the red candle or at its highs.
As such, the piercing line trading close to the red candle’s highs could trigger some sell-stop orders.
And if the next candle closes above the red candle’s high, it could propel prices even further.
The stop losses placed above that high will turn into sell-stop orders.
And the buy-stop orders at the pattern’s resistance will also be triggered.
A combination of these actions helps to push prices.
2. Increasing Open Interest:
Steve Nison in his book Japanese Candlestick Charting Techniques recommends also checking the open interest (OI).
This is particularly useful for futures traders.
Open Interest is just the number of buyers or sellers in the market.
It is believed that open interest is always equal at each time.
This is because a certain number of buyers would need the same number of sellers to transact.
Also, an increase in OI shows more buyers and sellers are creating new positions in the market.
And a reduction in OI hints market participants are exiting their positions.
It could also mean no new participants are entering the market since those that left have not been replaced.
Open interest can remain unchanged if these participants are doing the opposite of each other.
That is, one is entering a position while the other is exiting.
How can you use Bitcoin open futures to determine what’s happening on the piercing pattern?
Check the OI chart to see if the trend is increasing or reducing rapidly.
Piercing Line Candlestick Pattern Examples
Here are some examples of the piercing line candlestick pattern.
They’re gotten off different timeframes and cryptos.
A variation of a piercing pattern was formed on the Bitcoin/USDT 8-hour chart below.
The pattern fell into the support zone.
You would’ve taken a long at the green candle’s close.
Or wait for more retest of the level before making an entry.
Retests occurred on a bullish engulfing candle, which led to a triple bottom formation.
The profit targets indicated on the chart are the previous highs.
The Bitcoin/USDT 5-minute chart below is of a descending triangle.
This is a pattern that hints price will trade lower.
Hence, even though you’ve spotted your piercing pattern at a downtrend, you need to be alert price could trade lower soon.
You can either long to the dynamic resistance of the bearish triangle or wait to short the candle’s close below the support zone.
You’d notice none of the candles of the piercing pattern trade into the support zone.
Frequently Asked Questions
Here are answers to some frequently asked questions.
1. What is the Opposite of a Piercing Line Candlestick Pattern?
The dark cloud cover is the opposite of the bullish piercing line candlestick pattern.
This dark cloud is a bearish formation and consists of two candlesticks just like its bullish counterpart.
What’s more, it has a large green candle followed by a not too large red candle.
The red candle opens above the high of the green candle but does not close below it.
The pattern is found after an uptrend. It hints that the trend is coming to an end.
Hence, price may go sideways or reverse its trend.
The chart below is of a variant of a dark cloud cover.
It’s a variant since the red candle did not open above the highs of the green candle.
It still passes for a dark cloud since it significantly overwhelms the preceding bar.
2. Piercing Pattern and Dark Cloud Cover:
A piercing pattern can be likened to the bullish engulfing and bullish harami patterns
In contrast, a dark cloud cover can be compared to the bearish engulfing and bearish harami formations.
The size of the second candle on both patterns determines which is more or less bullish/bearish.
On that note, the engulfing patterns are the most bullish/bearish, followed by the piercing pattern, and finally the harami.
It means that you can take the trade on a piercing pattern especially if an engulfing candle has not been formed.
Here’s what each bearish formation looks like:
3. Which Candlestick Pattern is Most Reliable?
There’s no single pattern that is most reliable.
However, reliability depends on a number of factors such as:
1. Where the pattern is formed:
The candle’s strength would be most evident at the start or end of a trend.
Thus it’s ideal to watch out for these candles at support or resistance levels instead of the middle of the trend.
2. The length of the candle’s wick:
Some candles have wicks.
They include the spinning top, hammer, inverted hammer, shooting star, and hanging man.
There are also the long legged doji, gravestone doji, dragonfly doji, four price doji, etc.
Longer wicks are more powerful patterns since they denote price’s reluctance to go in the direction of the wick.
It says a failed attempt was made which is more powerful than patterns that have not made an attempt to run past their highs and lows.
An example is a bottoming tail candlestick in a downtrend.
3. Number of candles that combine to form the pattern:
The more the number of candles that combine to form a pattern, the better.
That’s why triple candlestick patterns are stronger than double candlesticks.
These candles include the morning and evening stars, three white soldiers, three white crows, an abandoned baby, etc.
The Bitcoin/USDT 2-hour chart below shows how price reversed from resistance after the formation of a shooting star and evening star.
The shooting star is a powerful pattern hinting rejection of higher prices. ‘
Whereas the evening star has a combination of three candles, which is just as powerful.
At support, a reversal took place after the formation of a southern doji.
The doji sowed a seed of doubt in the minds of bears since it hints at equal power between bears and bulls.
The bullish engulfing on the doji also completes a morning doji star pattern.
You now know how to trade the piercing candlestick pattern on Bitcoin and altcoin charts.
And you’d agree it’s quite easy to spot this formation especially if you’re already trading the bullish engulfing and harami patterns.
The major difference in the trio is the height of the second candle.
Therefore, keep a close eye for a piercing line since it’s one more pattern to profit off.
If you’re about price action trading and reading candlesticks like a pro, then use it!
Encountered issues while trying out this formation?
Reach out via the comments section below.