The piercing pattern is one of the 12 major candlestick patterns and it is a two-candle formation that occurs when the market is in a down trend. The first candle is black or red which is a continuation of the existing trend and the second candle opens below the low of the previous day. The piercing pattern closes more than midway up the black or red candle which is near or at the high for the day.
Criteria for piercing pattern
- The body of the first candle is black or red and the body of the second candle is white or green.
- The downtrend has been evident for a good period of time and a long black candle occurs at the end of the trend.
- The second day opens lower than the trading of the prior day.
- The white or green candle closes more than halfway up the black or red candle.
Signal Enhancements
- The longer the candle the more forceful the reversal.
- The greater the gap down from the previous day’s close the more pronounced the reversal.
- The higher the white or green candle closes into the black or red candle the stronger the reversal.
- Large volume during these two trading days is a significant confirmation.
Pattern Psychology
After a strong downtrend has been in effect the atmosphere is bearish. Fear becomes more predominant and the prices gap down. The bears may even push the prices down further however before the end of the day the bulls step in and dramatically turn prices around. The prices finish near the high of the day and the move has almost negated the price decline of the previous day. This now has the bears concerned. This move is confirmed by more buying the following day.
The psychology built into a major candlestick signal is simple common sense investment philosophy. When you learn how to utilize the candlestick signals correctly you now have the knowledge to improve your trading techniques for those trading entities you want to trade. You do not have to depend on canned programs that sometimes work and sometimes don’t work and you do not have to buy or sell stock recommendations blindly based on a research analyst’s recommendations. The candlestick signals provide guidance as to what investors are actually doing at a certain point in time. Learn the 12 major candlestick patterns as well as the secondary patterns and your investments perceptions will greatly improve.
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