A:

Upon spotting the piercing pattern two-candle formation, a forex trader who believes the pattern is correctly signaling a bullish market reversal can implement a trading strategy designed to take immediate advantage of the opportunity to profit from a market's shift from downtrend to uptrend.

The piercing candlestick pattern is considered by many forex traders to be a firmly reliable market reversal signal, especially when it occurs after a long-term downtrend. The piercing pattern is formed by two candles that show a distinct shift from selling momentum to buying momentum. The first candle in the pattern is a long down candle with a large body; the second candle is a similarly long, large-body up candle. Two distinguishing features of the second candle are that it opens below the first candle's close and it closes higher than the first candle's midpoint. The market's rejection of the gap lower open of the second candle and the subsequent retracement of more than half of the first candle's range are what indicate a major shift in market momentum. The piercing pattern offers traders the opportunity to "buy in at the bottom" of a bull market if the pattern's market reversal signal is proven correct, thus offering a trading opportunity with clearly defined, limited risk and lots of upside potential for an excellent risk/reward ratio.

A basic forex trading strategy can be implemented on virtually any time frame to take advantage of spotting the opportunity revealed by the piercing pattern, but it is best used on the hourly or higher time frame. For example:

- Buy with a market order immediately upon the close of the second candle.
- Place a stop-loss order a little below the open of the second candle.
- Add to the position if the next, or third, candle closes above the first candle's high, still using a stop below the second candle open.

The piercing pattern offers an excellent forex trading opportunity, the chance to realize substantial profits with narrowly limited risk. Since market reversals often move sharply, profits can be locked in quickly.

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