What is the Piercing Pattern?
One of the reversal candle patterns which you rarely see in Forex charts is the piercing pattern. This formation consists of two candles which usually appear at the bottom of a downtrend and is a significant sign of reversal. It especially becomes more reliable if you spot it around a support area. The following image shows a typical piercing pattern.
The main specifications of this formation include...
- The first candle is a bearish candle with a relatively long real body. The low of this candle is lower than the previous candle's low.
- The second candle is a bullish candle which opens lower than the low of the first candle. This candle then closes somewhere in the middle of the first candle's real body.
- This formation is more reliable if the penetration of the second candle in the real body of the first candle is more than 50%. In other words if you locate the midway between open and close of the first candle then the close of the second candle is above the midpoint.
- If the pattern shows a low below a major support level but fails to close below that resistance level then it is a stronger reversal sign. It shows that bulls have managed to take control of the market so the odds of reversal are very high.
You may use this formation for daily charts, intraday charts, or even weekly and monthly charts. As I mentioned earlier this pattern is rare comparing to the engulfing pattern or even hammer or hanging man but it could be more reliable. I suggest using other technical tools such as support lines, or moving averages, or trend lines to confirm this pattern.
The bearish formation, that is similar but in the opposite direction to the piercing pattern is called dark-cloud cover.
Locating the Piercing Pattern in a Chart
The definition of this pattern just like other candlestick formations is to some extent subjective. For example when it says that the first real body must be a relatively long one, how do you define this in terms of numbers? I tried to overcome these challenges by some reasonable assumptions. Some of the assumptions that I have made are the following ones.
- To define a long real body I assume that the real body of the first candle is the greater of 5 pips or 20% of the ATR. I also assume that the real body is at least 50% of the range of the candle. This simply means you could hardly see this formation in intraday charts especially those which deal with less volatile pairs.
- I defined a penetration factor to make the indicator more flexible. The default value for the penetration factor is 0.5 or rather 50%. It means that the second candle must close above midpoint of the real body of the first candle. If you reduce this value you may encounter patterns that could be considered piercing but the second candle is shorter than the default definition.
I also made some other assumptions to make sure the indicator works properly. The following image shows a pattern that is located by this indicator. The Piercing indicator places a green up-arrow on the second candle.
Download the Piercing Pattern Indicator [download]
Click here to download the compiled version of this indicator. I have designed the indicator for MetaTrader 4 (MT4). If you are not using the latest build of MT4 then you may encounter technical problems. Click here for more information and possible solutions.
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