The next bullish reversal pattern that we are going to discuss, consists of two Japanese candlesticks.

The Piercing Line forms at the bottom of a decline or near a support area.

The first candle is a long black body confirming the direction of the prevailing trend and the bears’ intention to push prices lower. Of course, in the markets, nothing is 100% and this was true during the formation of the Piercing Line. After the first candle is formed one would expect the continuation of the downward direction especially considering that the open of the second candle is lower than the previous low.

But unfortunately for the sellers, an important event or the release of significant information shifts the balance between buyers and sellers in favour of the buyers and as a result a long white body forms and closes s above the mid-point of the first candle. This signals as might have guessed the weakness of the bears to maintain the decline and the overwhelming strength of the bulls to pull the prices higher.

Now, it’s a good time to list the specifications of the Piercing Line:

1. The first candle is a long black real body in the direction of the decline
2. The second candle opens below the low price of the previous candle
3. The second candle is a long white real body
4. The second candle closes above the middle of the first candle

Excellent!

What about any potential buy setups? Well, a potential buy order may be placed just above the high of the long white body. Some traders would place it after the high of the long black candle. As I always say never forget to place a protective stop loss at the low price of the long white candle.

I hope you learned something new. See you in a while!