A piercing pattern is a type of bullish reversal pattern and consists of two large candlesticks, one bearish and one bullish, which are preceded by a bearish trend.
Therefore, we are looking at a Japanese candlestick pattern, included in the technical analysis. In this case, with a change from a downtrend to an uptrend. This type of analysis is very useful for making investment decisions in Trading.
Of course, as on other occasions, it must meet a series of requirements and, in addition, there must be a previous trend, in this case bearish. On the other hand, it is always advisable to reinforce these patterns with fundamental analysis and other indicators such as the moving average.
How a penetrating pattern works
The operation of the penetrating pattern is as follows (see figure). First, a bear market closes, with the first candle (blue or black) appearing. Prices then move lower than in the previous case, but open the next day with a bullish (white) candle.
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Then, in that session, there is a recovery in prices, which begin to rise. At the end of this session, prices are higher than the previous day’s close. In this way, we are really facing a change in trend.
Characteristics of a penetrating pattern
Let’s see some of its most relevant characteristics (see figure):
- First of all, the most important and that we have mentioned, is that there must be a previous downtrend.
- On the other hand, the first candlestick is bearish and large, and the second one is bullish.
- The bull has to close at least above the midpoint of the bear candle.
- The bullish candle has to open below the low price of the bearish one.
- We must be careful not to confuse this pattern with the bullish engulfing one, since in this case the bullish candle covers the entire bearish one.
- It is a very reliable pattern, especially when the body of the bullish candle is very large or the close is higher on the chart.
- Reliability is also higher if we are close to support or resistance.
Stop loss and level confirmation
The stop loss would be a conditional sell order at a minimum price. As in this case we are facing a change towards an uptrend, this concept is very important and must be taken into account for the moment of the breakout.
On the other hand, we have the level confirmation, which tells us the last closing price. In the case of the penetrating pattern, this is very important because the way to confirm this pattern is for the prices of the next session to go above it.