How to Make Money Trading with Candlestick Charts

Piercing Signal

---

Criteria
In order for the piercing signal to be valid,
the following conditions must exist:
The stock must have been in a definite
downtrend before this signal occurs. This
can be visually seen on the chart.
The second day of the signal should be a
white candle opening below the trading
range of the previous day and closing at
least half way into the body of the
previous day’s dark candle.
Why the Reversal Works
Let us say stock XYZ is moving down

---

steadily. There comes a time when investors
who are suffering losses in that stock begin
doubting themselves. They start getting
emotionally drained looking at their
portfolios every day. Finally, they give up.
Usually there is a climactic sell-off in the
stock. Next day the stock gaps down and
smart money pours in. The supply of shares
is snapped up by the demand. The stock
starts rising and finally closes up for the day
creating the white candle body. Now, the
Japanese give great importance to the
number 2. They have found over centuries of
trading that if the bulls can manage to close
the second day’s candle 
more than half way
up the previous black candle, that puts the
probabilities greatly in their favour that they
have reversed the trend.

---

The existence of the following conditions
makes the trend reversal more convincing:
The first day’s dark candle body is very
long compared to the rest of the trading
range.
There is a spike in volume on either of
the two signal days.
The first dark candle has gapped down
from the previous trend. This shows the
desperate need for the last of panic
sellers to get out of the stock.
Stochastics are in oversold condition.
The second day’s white body opens way
below the trading range of the previous
day.

---

Figure 7.2
shows a chart of Essar Oil.
Notice how the trend reversed with a
piercing signal. Also observe that the
stochastics were in the oversold region,
giving that much more weight to the
probability of this happening.
Figure 7.2: