Still in the category of Japanese candlestick techniques, the piercing and dark-cloud cover are powerful reversal patterns. If the morning and evening stars are a group of three candles, the piercing or dark-cloud cover patterns have only two candles. One is in the direction of the previous trend and the other one in the direction of the trend to follow.
The piercing pattern, like almost all Japanese candlestick setups, is a reversal pattern. To be more exact, it is a bullish reversal pattern. For a piercing setup to appear, we need a bearish trend. If you see something looking like a piercing, but there is no bearish trend before the pattern, it means the pattern is not a valid one.
For a piercing to form, the first candle in the pattern must be a strong, bearish one. The next candle to follow must be a bullish one, in the direction of the newly trend. The minimum condition for a group of two candles to be considered piercing is that the second candle (the bullish one) retraces more than fifty percent of the previous strong bearish candle.
What traders do is measure the length of the first candle in the pattern, find out the fifty percent retracement, and then check if the bullish candle closed above fifty, but below the start of the previous candle. This way, the piercing pattern appears. If the second candle goes and closed above the opening level in the previous candle, the market forms a different pattern: the bullish engulfing pattern.
Between the bullish engulfing and the piercing patterns, the first one is a stronger and more powerful pattern. But this is just in theory. Remember that on the Forex market not everyone is making money and obvious things are disregarded most of the times by other market participants. Therefore, it so happens that, not seldom, the piercing pattern is even stronger than the bullish engulfing one.
The opposite is true in the case of a dark-cloud cover pattern. While the name is different and sounds quite exotic, the rules are similar but applied to a bearish pattern. For a dark-cloud cover to form, we need a bullish trend. The first candle in the dark-cloud cover pattern must be a candle in the direction of the previous trend. Therefore, a strong, bullish candle.
The second candle in the pattern is a bearish one, that must travel beyond the fifty percent level of the previous bullish candle. Again, traders find that level and wait for the candle to close below it (because this is a bearish pattern), but not below the opening level of the previous bullish candle. If it closes below the opening level, the pattern is called a bearish engulfing.
When trading online, after opening a trading account, traders need to download a trading platform. Any trading platform, be it the MetaTrader or a custom built one, offers the possibility to see the price action in a candlestick format. There are three types of charts offered by default: line chart, bar chart, and candlestick chart. A line chart shows a simple line across the screen and has little or no use in trading. A bar chart shows the opening and closing prices of a period (hourly, 4h, daily time frame or more) and the distance price traveled between the opening and closing prices.
A candlesticks chart offers a different perspective to trading. It allows traders to look for patterns, mostly reversal patterns, and this is a great competitive advantage ahead of the market. Typically, traders wait for lagging indicators to enter a market, like a price to cross a moving average or something like this. But a reversal pattern given by candlesticks allow traders to jump in a trade right at the start of the trend, with little risk: the stop-loss should be placed at the highest point in the dark-cloud cover or the lowest one in the piercing pattern.