Understanding the Piercing Pattern: Reversal Signal Trading Strategy

PIERCING PATTERN

PIERCING PATTERN Description

The Piercing Pattern in Figure 2.29 is composed of a two-candle formation in a downtrending market. The first candle is black, a continuation of the existing trend. The second candle is formed by opening below the low of the previous day. It closes more than midway up the black candle, near or at the high for the day.

Criteria

• The body of the first candle is black; the body of the second candle is white.
• The downtrend has been evident for a good period. 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 candle closes more than halfway up the black candle.

Signal Enhancements

• The longer the black candle and the white candle, the more forceful the reversal.
• A greater the gap down from the previous days close, the more pronounced the reversal.
• The higher the white candle closes into the black 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. The prices gap down. The bears may even push the prices down further. But before the end of the day, the bulls step in and dramatically turn prices around. They finish near the high of the day. The move has almost negated the price decline of the previous day. This now has the bears concerned. More buying the next day will confirm the move. (See Figure 2.30.)