The piercing pattern is very similar to the bullish engulfing pattern with a very minor variation. In a bullish engulfing pattern the P2’s blue candle engulfs P1’s red candle completely. However in a piercing pattern P2’s blue candle partially engulfs P1’s red candle, however the engulfing should be between 50% and less than 100%. You can validate this visually or calculate the same. For example if P1’s range (Open – Close) is 12 , P2’s range should be at least 6 or higher but below 12.
As long as this condition is satisfied, everything else is similar to the bullish engulfing including the trade set up. Here a risk taker would initiate the trade on P2 around the close. The risk averse would initiate the trade, the day after P2 only after ensuring a blue candle is formed. The stoploss would be the low of the pattern.
Have a look at the following chart:
Here P2’s blue candle engulfs just under 50% of P1’s red candle. For this reason we do not consider this as a piercing pattern.
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