How to trade Piercing Line Candlesticks with Example: FKnol.com

The piercing line is a form of bullish reversal candlestick pattern which forms on the bearish downtrend and results in the possibility of the price reversing to move upwards.
The name emerges from the appearance of its shape - among downward moving red candles, a suitably sized green-colored candle appears which appears to pierce the pattern, hence the name.
It is a two-line pattern which means two candles are required to build it. The first candle is a bearish red candle which is the part of an ongoing downtrend. The first candle cannot be a doji candle.
The second candle, which immediately follows the first red one, is a green-colored bullish candle with certain specific price points. Its location is such that its body lies a bit below the body of the first candle, and its closing is above the midpoint of the prior candle's body but below the prior candle's closing price.
Most of the active traders often wait for the next confirmation candle to form before taking a position on a piercing-line-based candlestick pattern. When formed on a downtrend, the confirmation candle should be green in color representing the price reversal to the upward direction. This article explains the details of how the piercing line candlestick is formed, what market conditions are indicated by its formation, how to trade the piercing line candlestick, and the article also covers the most recent examples of the same. To understand the working and trading of the piercing line candlestick, let's start by checking the factors needed for its formation.

Construction of the Piercing Line Candlestick

The piercing line candlestick pattern can lead to a strong signal for price reversal, if along with its formation a few more factors are kept in mind to get into a trade. Its first candle should be a bearish red-colored candle which should be a part of a downtrend. This candle should be a non-doji candle - that is, it should have a suitable length.
The next candle which forms should be green in color, which indicates the initial signal for a reversal. This second candle should also have a suitable length almost comparable to the first candle. Additionally, the opening price of the second candle should be below the closing price of the first candle. Further, the close of the second candle should be above the midpoint of the first candle's body, and it should close below the first candle's open price. This means the body of the second candle should be placed a little below the body of the first candle as if it is shifted a bit lower overall.This is how a typical piercing line candlestick appears:

Formation of a piercing line candle pattern indicates that the price reversal is possible, and the ongoing trend of the red-colored bearish candles is expected to end soon. Before entering a trade based on the emergence of the piercing line pattern, many traders may like to wait for a confirmation candle to be formed immediately after the piercing line candle. If a green-colored confirmation candle is formed at the third place, it further supports the probability about the price increase in near future and the end to the downward price move. Its time to go long on the stock (buy), or cut the losses if already holding a short position.

Trading the Piercing Line Candlestick

The piercing line patterns can be spotted regularly on the price charts of various securities - like those of stocks, ETFs and market indexes. Since it appears commonly, one must remain cautious to only enter into a trade when all the necessary requirements are met. Many may end up as false signals, if the signals are not read properly.
The following factors need to be kept in mind to trade the piercing line candle.

During the initial downtrend prior to the formation of the piercing line patter, the sellers (bears) are in control of the market and have had an edge over the buyers (bulls). This leads to a few red-colored candles getting formed, after which the green-colored piercing line appears. This is the first sign that the price started from a low value of open, and then went all the way up to a high value as pushed up by the buyers who are attempting to make a come back to the market. This situation now moves from seller-dominant to buyer-seller equilibrium.
Then comes the confirmation candle of green color indicating a confirmed reversal to the bullish direction. The longer this confirmation candle the higher the chance of a continued up move. It will mean that buyers have now taken charge of the market prices with high demand and are dominating over the sellers.
If either of the piercing line and/or the confirmation candle is accompanied by a relatively higher trading volume, then it improves up the probability of price reversal. The buyers have returned to the market in full swing with high buying demand, and hence they are getting stronger and are able to push up the prices. Therefore, its time to go long - that is, buy the security, or cut the losses if holding a short position.

The piercing line candle pattern gains significance when formed during the downtrend. The formation establishes the backdrop for a potential reversal to upward move in the stock prices. Traders enter the trade when the piercing line is formed at the breakout of the lower Bollinger band, or at the breakout of the trend-line (like 200-day moving average), or at the breakouts of any other suitable ranges they may track. The larger the breakout indicated by the length of the candlestick, the stronger the reversal pattern. If the piercing line is formed in the middle Bollinger band or far away from the trend-line (without breaching the trend-line), then the traders may not consider it as a strong reversal signal and they avoid the trade. When formed around the middle band or away from the breakout range, the piercing line often leads to continuation of the existing trend instead of a reversal.

Trading Scenario for Piercing Line

The following are the general considerations and scenrio for trading the piercing line candlestick.

▶ Trade Entry: Formation of the piercing line candlestick pattern during a downtrend is taken as a sign of reversal, that is - the market prices are expected to go up in the near term. So traders try to take a long buy trading position at or around the low price of the piercing line candle. Since many traders may like to wait for the confirmation candle to form, their purchase price may be higher as the trend made the move which took the prices upwards. This will mean subsequently lower profits - but that's the tradeoff one needs to accept if waiting for a confirmation candle.

▶ Stop-loss Limit: The stop-loss varies from trader to trader based on their individual trade preferences, but usually while going long they set the stop-loss at 2-3 units below the low price of the piercing line baby candle. Others who enter at a higher price should adjust the stop-loss proportionatly.

▶ Profit-levels: While active trading at short intervals, traders must follow a risk-reward ratio to determine the possible profit level from their piercing line pattern trading. For instance, if the stop-loss limit is set at $10 for the trade (the maximum loss one is willing to take on a trade) and the risk-reward ratio one follows is 1/2, then one must take profits when it hits $20. If the risk-reward ratio being followed is 1/3, then one must aim for profits when the price hits a level that generated $3 for every $1 stop-loss set.

▶ Market Conditions: Along with the above mentioned piercing line formation requirement, traders should ensure that their selected price range, bands or trend-line limits are getting breached with large moves of the second bearish (and subsequent) candle. This ensures higher success rate of profitability. Although one must note that trading on technical analysis like candlestick patterns has limited success rate, so following strict stop-loss, disciplined trading and efficient capital management is advised.

Example of Piercing Line Candlestick

The following chart shows an instance of piercing line candlesticks and the uptrend that followed shortly after:

As one can observe in the above chart, the piercing line candle pattern which emerged and was followed by a confirmation candle reversed the ongoing downtrend that preceded the first red candle. It led to an upward move indicated by the long green arrow. Additionally, there was a range breakout, though with a nominal value, which added to the possibility of the price reversal.
Traders usually set their profit targets and stop-loss levels based on the risk-reward ratio of their choice as mentioned in the previous section.

Latest Piercing Line Formations

FKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming piercing line candles is updated on a daily basis. At present, the following are three examples - one each from stocks, ETFs and indexes - which have formed the piercing-lines as of the mentioned date (in reverse chronological order):
1) On Monday, Oct 26, 2020, the stock price of Health Care sector based Abbott Laboratories (ABT) formed the following Piercing Line Candlestick pattern:

Day	Open	Close	Body Length
Today's	$107.57	$109.00	$1.43
Previous Day's	$109.64	$107.79	$1.85
Today to Previous Day's Body Length Factor:			0.77

$109.64
		$109.00
$107.79
		$107.57

See full details and past history of Piercing Line Candlesticks for Abbott Labs (ABT)

▶ Full list of stocks which most recently formed the Piercing Line Pattern

2) On Friday, Oct 23, 2020, the price of Treasuries based iShares 20+ Year Treasury Bond ETF (TLT) ETF formed the following Piercing Line Candlestick pattern:

Day	Open	Close	Body Length
Today's	$156.81	$158.01	$1.20
Previous Day's	$158.29	$157.05	$1.24
Today to Previous Day's Body Length Factor:			0.97

$158.29
		$158.01
$157.05
		$156.81

See full details and past history of Piercing Line Candlesticks for iShares 20+ Year Treasury Bond ETF (TLT)

▶ Full list of ETFs which most recently formed the Piercing Line Pattern

3) On Thursday, Oct 15, 2020, the value of popularly tracked leading stock market index S&P MidCap 400 (MID) formed the following Piercing Line Candlestick pattern:

Day	Open	Close	Body Length
Today's	$1,963.62	$2,002.82	$39.20
Previous Day's	$2,009.91	$1,984.28	$25.63
Today to Previous Day's Body Length Factor:			1.53

$2,009.91
		$2,002.82
$1,984.28
		$1,963.62

See full details and past history of Piercing Line Candlesticks for S&P MidCap 400 (MID)

▶ Full list of Market Indexes which most recently formed the Piercing Line Pattern

...and there's more. FKnol.com everyday checks the stock price and candlestick formation across hundreds of stocks, ETFs and indexes to look for piercing line formations. Please see the full list of recent piercing line formations for:
▶ Full list of recent Piercing Line Stocks
▶ Full list of recent Piercing Line ETFs
▶ Full list of recent Piercing Line Indexes

The Bottom Line

Trading candlesticks like the piercing line needs strict discipline and emotion-free trading. Candlestick trading is a part of technical analysis and success rate may vary depending upon the type of stock selected and the overall market conditions. Use of proper stop-loss, profit level and capital management is advised.
One can also explore the similar candlestick formations on various dates using the below screener:

Search Piercing Line Candles for a particular: