How to Trade with the Piercing Line Pattern

What is a piercing pattern？

The piercing line pattern is seen as a bullish reversal candlestick pattern located at the bottom of a downtrend. It frequently prompts a reversal in trend as bulls enter the market and push prices higher.

The piercing pattern involves two candlesticks with the second bullish candlestick opening lower than the preceding bearish candle. This is followed by buyers driving prices up to close above 50% of the body of the bearish candle.

The image below highlights the intricacies of the two candlesticks making up the piercing pattern:

How to identify a piercing pattern on forex charts？

Characteristics of a piercing pattern:

Occurs at the bottom of a downtrend

Includes a bearish and bullish candle

The bullish candle opens lower than the close of the bearish candle

Bullish candle then closes above the 50% level of the bearish candle body

What does this tell traders？

Potential trend reversal to the upside (bullish reversal)

Bears (sellers) are losing impetus at this key price level

Advantages of trading with the bullish engulfing candle:

Easy to identify for both novice and experienced traders

Possibility of favourable risk-reward ratios

Desirable entry levels can be obtained after confirmation of the piercing pattern

Trading with the Piercing Line Pattern: Top Tips & Strategies

The weekly EUR/USD chart above shows the presence of a piercing pattern highlighted in blue. Preceding this pattern is a strong downtrend as indicated by lower lows and lower highs. This example illustrates the use of price action to determine the downtrend. However, traders often prefer the use of a technical indicator such as the moving average for confirmation (price needs to be above the long-term moving average).

As mentioned previously, the piercing pattern does require further confirmation before entering into a long trade. In this example, the RSI oscillator has been used as additional confirmation of a reversal. From the chart, the RSI indicates an oversold signal which reinforces the validity of the piercing pattern.

Stop levels can be placed at the recent low (low of the bullish piercing pattern candle), while the take profit (limit) can be identified using Fibonacci extensions or price action.

How reliable is the piercing line？

Piercing line patterns signal bullish reversals however, the reliance of this pattern alone is not recommended. Further support signals should be used in concurrence with the piercing pattern. Trading against a dominant trend can be risky, so finding multiple confirmation signals is encouraged to verify the pattern.

What is a Dark Cloud Cover Pattern？

The Dark Cloud Cover pattern is a candlestick pattern that signals a potential reversal to the downside. It appears at the top of an uptrend and involves a large green (bullish) candle, followed by a red (bearish) candle that creates a new high before closing lower than the midway point of the previous green candle.

This candle formation, although very similar, should not be confused with the Bearish Engulfing candle pattern. Both patterns signal a potential trend reversal, but the Dark Cloud Cover offers more attractive entry levels due to a higher close to the bearish candle than that observed with the bearish engulfing candle pattern.

How to identify a Dark Cloud on Forex Charts

Dark Cloud Cover Checklist:

Identify existing uptrend.

Look for signals that momentum is slowing/reversing (stochastic oscillators, bearish moving average crossover, or subsequent bearish candle formations).

Stocks will gap up, with the red candle opening above the previous green candle however, this is very rarely found in forex candlesticks as these candles will mostly open at the same level as the prior candles close, or very close to it.

Ensure that the red candle closes lower than the midway point of the previous green candle.

Look for confirmation of the new downward trend

How to trade using the Dark Cloud Pattern

Traders can look to trade in more traditional trending markets such as GBP/USD or EUR/USD, but can also incorporate Dark Cloud Cover technical analysis in ranging markets.

Trending markets

Below is an example of the Dark Cloud Cover pattern in forex, specifically, the GBP/USD forex pair. Refer to the chart for more information.

This Dark Cloud Cover checklist can be used to analyze a potential trade:

The existence of higher highs and higher lows presents us with an uptrend.

On the chart, one can observe that the market had started to move more sideways as the latest upward move initially moved sideways and when it did move up, this was not as sharp a move as previously observed. Furthermore, the RSI moved into overbought territory providing a greater level of conviction to the trade.

The red candle gaps slightly above the previous green candle. In the forex market, the candle will mostly open at the same level as the previous close.

The red bearish candle proceeds lower and closes below the midway point of the bullish candle, showing that the bears are outweighing the bulls at that level.

Confirmation of continued selling (downward pressure) is seen in the very next candle and subsequent candles after that. Lower highs and lower lows then provide the evidence that the market had reversed successfully, and a downtrend was established.

Entry levels, targets and stops can be easily identified when taking a look at the zoomed in chart below. The entry can be placed at the open of the next candle, after the Dark Cloud Cover pattern has formed.

Stops can be placed above the recent swing high and the initial target level can be set at key levels or recent areas of support/resistance. It is worth noting that, because the trade is potentially the starting point of an extended move down, traders can set multiple target levels.

Ranging markets

A similar strategy can be applied in a ranging market where price tends to ‘bounce’ between support and resistance. The below example shows a period of consolidation in GBP/USD when it was clearly not trending in any direction. The Dark Cloud Cover pattern appearing near resistance provides a short signal and should there be enough momentum, it could turn into a breakout trade - as it did in this example.

Advantages and limitations of the Dark Cloud

The validity of the Dark Cloud, like all other candlestick patterns, depends on the price action around it, indicators, where it appears in the trend, and key levels of resistance. Below are some of the advantages and limitations of this pattern.