On any given day, numerous patterns form on the price charts. One of these is the Piercing Line candlestick pattern, which is a bullish reversal pattern.
Using Piercing Line Pattern Candlestick In Binary Options
Here you will learn more about this pattern and its application in your binary options trading strategy.
How does a Piercing Line pattern form?
The Piercing Line pattern is a bullish reversal pattern. It is bullish because when it forms, it causes prices to go up. It is a reversal pattern given that its formation occurs at the bottom of the bear markets, causing prices to reverse.
Two candlesticks characterize the Piercing Line pattern—one candlestick is bearish while the other one is bullish as it opens just under the close price and closes just below the open price of the bearish candlestick i.e. the first candlestick. If this second candlestick goes up and closes beyond the open price of the bearish candlestick, the resultant pattern would be a Bullish Engulfing pattern, which will be described in a later article.
Back to the Piercing Line pattern...
Characteristics of a strong piercing pattern
As a trader, here’s how to identify a strong piercing pattern:
1. The first candlestick should be big and bearish; the bigger, the better.
2. The second candlestick should be big and bullish. It should be big enough to engulf or cover most of the first candlestick’s body. The pattern is particularly strong when the second candlestick engulfs the most part of the first one.
3. The first and second candlesticks need to have emerged out of the Bollinger Lower Band in a strong way. The stronger the emergence or breakout from the Bollinger Lower Band, the stronger the pattern’s reversal element.
4. It is also important that the Piercing Line pattern appear where the bears are relatively weak. If the pattern forms where the bears are too strong, it is recommended that you ignore the signal given the high risk of continuing with a market that is too bearish.
Admittedly, it is not always easy to spot a Piercing Line pattern that demonstrates all four characteristics. The Piercing Line pattern derived its name from the fact that the pattern pierces through the halfway point of the first, bearish candle.
Can you enter a trade after spotting a Piercing Line pattern?
The Piercing Pattern is a strong reversal pattern. It is an indication that traders are rejecting lower prices, which can be seen by the lower opening of the second candle. It is also a clear indication of the prevailing buying strength, which can be seen by the strong upper close on the second candle.
Both the first and second candle easily shows you any changes in market sentiments. One can effectively enter a trade when the Piercing Line pattern is spotted, because the pattern indicates lower risk and a high potential to make and take a profit. The only imminent risk is the decline of prices, which would nullify the bullish market in which the pattern initially formed.
Another technical indicator you would want to look at to confirm the formation of a Piercing Line pattern is the trade volume. If the trade volume is quite low the first time the pattern forms and is then followed by a rapid increases in trade volume, which results in the formation of the bullish, second candle, this signifies a strong pattern. The low volume followed by high volume is an indication that sellers’ interest is low while buyers are eager to buy.
In summary, the Piercing Line pattern is an effective pattern for making trade entries where the risks are low and the potential for profit is high.