An Easy Way To Trade Pin Bars

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Simple Price Action Strategy Using Pin Bars

Simple Price Action Strategy Using Pin Bars

There are many ways to trade price action, some complicated while some are simple. The Pinbar is one of the ways to trade forex based on a very simple price action strategy principles. Not only is the Pinbar price action simple to trade it is also very effective. Beginners to forex trading and more importantly, price action trading, will find the Pin bar price action setups to be a relatively easy way to learn to trade without any indicators. For the advanced or experienced traders, the Pinbar rejections can be used to enhance their trading strategies as well, including strategies that involve trading with indicators.

This is the Price Action Strategy that Professional Traders use to get into positions early.

What are Pinbars?

Pinbars in forex price action go by names including pinnochio bars. They are identified by a small body in comparison to the range and often leave long wicks. Pinbars are not to be confused with other price action candlestick patterns such as long legged doji, dragonfly doji. In some cases, a hammer, hanging man, shooting star also qualifies as Pinbars. Regardless of what name the price action set up goes by, traders should simply focus on candles that have a small body in relation to long wicks.

When the Pinbar patterns occur, it signifies rejection of prices and a short term reversal. They are more valid and important especially when Pinbars occur at key support/resistance levels or even at the pivot levels.

The chart below illustrates a simple or a basic Pinbar pattern.

How to Trade Pinbars Price Action

There are different ways Pinbars can be used for trading and it is this flexibility that makes it a versatile price action set up that is easy and efficient.

Pinbar Reversals: Pinbars work off the premise that when they occur at the top or bottom of a sustained trend they signal a short term reversal or a correction. The chart below shows simple Pinbar reversals when they occur at the top and bottom of the short term trends in the market.


Pinbar reversals on chart – Tops and Bottoms

Pinbar Reversals with Stochastics: Although not purely price action, the Pinbar reversals can be traded with more confidence when using the Stochastics oscillator. The buy and sell signals triggered on the Stochastics oscillator can be taken with more confidence when there is confluence with the Pinbar being formed at the reversal as well. The next chart below shows an example where the Pinbars that are formed along with a confirmation from the Stochastics moving from the OB/OS levels can trigger great risk/reward set up based signals.

Pinbar Reversals with Stochastics

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Pinbars as Support/Resistance: Another simple way to trade with the Pinbars is to use the price rejection levels as support/resistance. Simple plot two horizontal lines on the low (or the high) to the close (or open) price and trade based off prices react these levels in the future. To illustrate this, the first chart below shows the support/resistance levels that were drawn off using the Pinbar.

Using Pin Bar to Identify Support and Resistance – Example 1

After quite a few bars, we can see that the initial range that was identified using the Pinbar has played an important role in terms of acting as support/resistance offering a great level to take trades or simply can be used as reference points for future price action.

Using Pin Bar to Identify Support and Resistance – Example 2

Pinbars Price Action is simple to learn and trade. It’s a truly Simple Price Action Strategy

As illustrated in the above examples, Pinbars are simple candlestick patterns that can be used to trade effectively. Their simplicity combined with their efficiency makes trading with Pinbars a very simple approach to trading forex price action. Given their flexibility, Pinbars can also form an integral part of an existing trading strategy and can be used to enhance better trade set ups.

To learn more on Price Action, click here.

An Easy Way To Trade Pin Bars

This article on How to Trade Pin Bars is the opinion of Optimus Futures.

Trading specific candlestick patterns seems to be an intuitive exercise for most traders. Technical traders are particularly interested in using candlestick patterns as a trigger for their trades or a confirmation factor for either a trade opportunity or for general directional bias.

Within candlestick patterns, perhaps the most common and widely used pattern is the hammer or the pin bar, one of the most effective patterns to denote market turnarounds.

Let’s take a deeper look at pin bars:

Why Pin Bars are Important

Pin bars are among the top choices for most technical traders that follow price action signals, but few do more than just take it as a fact. Understanding why they are important for order flow and market dynamics goes a long way in ensuring you use this effective pattern to its full effect.

We’ll start by looking at a bullish and a bearish pin bar:

The pin bar is effectively comprised of two segments, the “wick” portion and the “body” of the candlestick. Ideally, we want the body to be small relative to the size of the wick. The small body and the large wick play a big role in terms of why the pin bars can be effective.

In an uptrend you would normally expect candlesticks to comfortably close well higher than their open, possibly close to or at the high itself – that is leaving little to no wick on the upside. Such candlesticks are termed as generally bullish and indicate the continuation of the trend.

On the flip side, there is much to conclude from a candlestick that opens and shoots higher, only to close back down either below the open or close to it – creating the characteristic large wick and a small body of the pin bar.

For one, depending on where the pin bar is actually located on the chart, it could be an indication of price hitting a large block of opposing orders. Unlike a more ‘rounded’ action comprising of multiple candlesticks, a pin bar will often engrave the foundations of the reversal within the wick itself. That is because price essentially was able to initially head in the direction of the trend and then fall just as much within the candlestick period alone. At key locations (such as horizontal support and resistance levels) this information can be gold.

Imagine a pin bar wick protruding into a key resistance level. Now that you know a pin bar can underscore a major order flow tip over, can you guess which points on a chart would suit the pin bar pattern more than other locations?

We’ll answer that next.

Where to Look for Pin Bars

When you go back to your markets and charts to start hunting pin bars, you might straight away notice how frequently you may be seeing candlesticks that can be termed as pin bars – that is, having a small body and a relatively longer wick protruding on one side. In this section, we look at where to find them for maximum effectiveness.

As a rule of thumb, we are looking for bullish pin bars (pin bars with a large wick to the downside) at swing highs and key resistance levels. Bearish pin bars (with wicks protruding to the upside) are best found at swing lows and key support zones. Note that while we are looking for a small body on a pin bar, the color of the candlestick itself (close lower than open versus higher) usually does not make the pin bar bullish or bearish. Rather that conclusion derives from the direction that the wick protrudes in.

This means that a bullish pin bar may have the close lower than the open, although one that has a close higher than the open (that is an overtly bullish appearance) may be considered a stronger more visually appealing bullish pin bar. The case will hold vice versa for a bearish pin bar too where a close higher than the open is acceptable but less desired than a bearish close.

Here is a quick visual example of a pin bar piercing an important level thereby raising its importance. Notice that the bullish pin bar forms at key support here marked by the prior swing low. Also, notice how the wick actually pokes past the swing low itself. In another article, we explained in elaborate detail why price momentarily moving past key support and resistance levels and failing is often a key factor in determining market sentiment. It is better to have that phenomena merge in with the pin bars.

To further validate this point, refer to the same chart and you might notice a bearish pin bar pattern that actually failed. You may realize that the wick actually never pierced the resistance at the former swing high at all and formed under it.

It also helps to locate pin bars with wicks that protrude away from the candlesticks in the vicinity. It serves as a valid visual aid to ensure your pin bars are located at potential swing points rather than in sideways market action or periods of consolidation where their impact might be constrained by nearby support and resistance levels.

In the chart above we point to two bullish pin bars. Notice how Pin bar 1 actually forms at a minor pullback to the downtrend. That is, we had three candlesticks prior to it pulling back into the downtrend. As a result, we have a wick that is large enough but does not protrude far enough outside the vicinity of the most recent price action. Notice how it also fails to pierce the swing low a little farther away to the left.

Pin Bar 2 on the other hand forms at a swing low, and although smaller in size than Pin Bar 1, it’s still placed better and a has a wick that protrudes past the important swing low to the left. In hindsight, we can see that the first pin bar failed yet the second one did help reverse the bearish momentum.

As we talk about the importance of former support and resistance zones and swing points as key areas to be looking out for when locating higher probability pin bars, it is also worth noticing that the same key levels when falling in the pathway of the pin bar’s expected direction yield could severely hinder the pin bar’s effectiveness.

Take the above chart for example. We have a strong looking bearish pin bar at a swing high. However, instead of forming at the key resistance level, it forms above it, such that price could potentially be expected to hold as support at the former resistance – which in hindsight, it does.

The market merely closed the gap and price reversed back above the 51.00 round number support and resistance zone marked in pale orange in the chart above.

When looking for pin bars at key levels in the market, it pays to foresee where the price would be headed if you do decide to trade (or otherwise follow) the pin bar as a valid setup. If there are key levels falling immediately in the way, it can sometimes stack the odds majorly against the direction you would expect the price to take in lieu of the pin bar formation.

How to Trade Pin Bars

Depending on the risk appetite, there are several ways people choose to trade pin bars with varying strategies for entry and exit (take profit and stop loss).

Stop-Loss Disclaimer: The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.

Aggressive futures trading approaches call for trading the pin bar at the close and sometimes at a retracement into the pin bar to attain a better price point for the trade. These strategies assume the pin bar and the setup overall is strong enough to expect a quick and sustained move in the direction of the pin bar, as in the case with a large pin bar protruding into an extremely important long-term support and resistance zone.

A more conservative approach calls for taking the trade at the ‘break’ of the pin bar. For this strategy, conservative traders like to place a stop/limit order a few ticks above the bullish pin bar and below the bearish pin bar as a cushion against the likelihood of price never taking off in the anticipated direction at all.

Consider one of the failing pin bars we discussed above.

We identified Pin Bar 1 as a failure because the price was essentially able to move in the opposite direction past the pin bar’s low. Notice, however, that it also never broke the high of the pin bar either. While an aggressive trade might have taken a loss on this one, a conservative trader would have been safe as a potential stop order a few ticks above the high of the pin bar would have never really triggered at all.

As far as stops go for pin bars, traders usually prefer to stack it just beyond the wick of the pin bar, so as to book a loss when the pin bar technically ‘fails’. Again, more aggressive traders will sometimes place the stop tighter, perhaps just above a round number or a key level in the market that the pin bar’s wick protrudes far into. Other times a tighter stop could result from the anticipation for a quick sharp break of the pin bar due to the strength of the setup itself.

More conservative stop placements can sometimes call for stops being farther away from the pin bar’s wick, perhaps beyond a round number or in a more choppy market where the wick’s length may not be sufficient enough to safeguard against a sharp price movement, that may otherwise not be threatening to the setup itself.

Regardless of what style you adapt to follow and trade pin bars, they are a must in every technical trader’s arsenal. When it comes to candlestick patterns and their credibility, pin bars arguably take the lead amidst all others.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

Forex Training Group

One of the most reliable candle formations you can see on the Forex chart is the pin bar. Many traders consider this as one of the most powerful candlestick patterns for trading. So today’s discussion will be dedicated entirely to the pin bar reversal candle. Let’s dive in.

The Pin Bar Setup

I bet you have seen many pin bars on your Forex charts. Maybe you haven’t been aware that you are looking at a pin bar formation per se, but you most likely have come across this candle:

Above you see the structure of the pin bar candlestick pattern and its four variations. The candle’s unique structure includes a long candlewick, a small body, and a small candlewick opposite the long candlewick. An important rule for identifying a pin bar is that the long wick should comprise at least 2/3 the size of the entire candle. Some traders find it useful to program a Pin Bar indicator in Metatrader or their preferred trading platform to make it visually easier to spot on the chart.

Many traders believe that the name “Pin Bar” comes from the pin like or needle like appearance of the candle. Actually, the name “Pin Bar” is short from “Pinocchio Bar” which was popularized by Martin Pring in his book “Technical Analysis Explained”.

The pin bar candle can be seen frequently on a Forex chart. However, the best tradeable pin bars are usually located at the end of an impulse wave, and extends outside of the preceding price action. When traders see a pin bar sticking out above or below the recent price action after a prolonged move, they could prepare to trade contrary to the trend attempting to catch the reversal price momentum.

Pin bars can be thought of as a price rejection zone, where major market participants have rejected price from staying at a particular price level. Before the price action closes a pin bar, the candlewick has initially been part of the candle’s body.

In this manner, before being completed, the pin bar candle has seen a large body in the direction of the trend. This creates the impression that the trend might continue with strength. However, contrary pressure appears and the candle closes near its open level, which ultimately appears as a big candle wick. Typically “The bigger the nose (wick) the bigger the lie”, referring to the unsuccessful big candle body, which has ended up being a wick. This is where the “Pinocchio” name comes from. Therefore, the bigger the wick the pin bar has, the stronger the reversal pressure is expected to be!

Bullish Pin Bar

A valid, tradeable bullish pin bar is located at the end of a bearish trend and its lower candle wick goes below the overall price action. If you spot a bullish pin bar setup on the chart, this will setup a nice opportunity for a long position.

Bearish Pin Bar

The same is true for bearish pin bars but in the opposite direction. The bearish pin bar is located at the end of a bullish trend and its longer candle wick is the upper area. In this manner, the longer wick is sticking out above the price action. The bearish pin bar is usually a good sign of an upcoming price reversal in the bearish direction.

Pin Bar Chart Examples

In general, when trading pin bars, speculators should look for big candle wicks forming beyond the recent price action after a prolonged price move. There are usually the best pin bar formations to trade. However, pin bars can also be valid during a trend, as prices are taking a pause or taking a breather prior to the resumption of that trend.

Pin bars formations that should be avoided are the ones which are counter to the trend but that do not stick above/below the general price action. In addition to this, pin bar signals that occur during a period of consolidation should also be avoided. Now have a look at the image showing you some pin bar formations on the chart:

The chart above starts with a bearish trend. At the end of the tendency the price action creates a bullish pin bar. The longer wick sticks out below the price action. Therefore, we confirm the pattern to be real. The price then shifts its direction and starts increasing.

After a prolonged bullish move, we get a bearish pin bar. The longer wick of the candle sticks out above the recent price action. Therefore, we confirm the reversal character of the candle. The price starts decreasing afterwards.

On the way down we see another bearish pin bar. However, its longer candlewick doesn’t stick out. Nevertheless, we could consider this a tradeable pin bar, because it is in the direction of the trend. It confirms the potential for a downward price movement. As you see the price continues the down run after this pin bar signal.

Later on, we spot a bullish pin bar on the chart (red circle). The candle has a reversal character. However, the longer wick doesn’t stick out below the price action.

Therefore, we can conclude that this pin bar is not a valid signal, since there is no real price rejection evidence to foretell a reversal of the bearish trend. Soon the chart validates this was a false pin bar and the price decrease continues.

By now you may have noticed that these Forex pin bar formations look like the hammer candlestick pattern and shooting star candlestick pattern. And if you did recognize this, you would be one hundred percent correct, as they are one in the same. The hammer and the shooting star are types of pin bar variations.

Price Action Trading with Pin Bars

As you know, successful forex trading is not only about identifying different patterns on the chart. We must know how to take advantage of the different chart patterns and incorporate a strategy around it.

Now that you are familiar with properly identifying pin bars on your price chart, we can now show you how to trade these formations.

Opening a Pin Bar Trade

When you spot a valid pin bar on the chart you should be aware of when to enter a trade. There are many different entry and exit strategies around pin bars, and in the following section, I will discuss one of these timing strategies as an example.

Bullish Pin Bar – When you identify a valid bullish pin bar you could buy the Forex pair at the first candlestick which closes above the small wick of the pin bar.

Bearish Pin Bar – When you spot a valid bearish pin bar setup, you could sell the Forex pair at the first candlestick which closes below the small wick of the pin bar.

Stop Loss on Pin Bars

As with every other trade setup, you should never be unprotected during your trade. Make sure you always use a stop loss order. Let’s discuss where we would place the stop loss order when trading the pin bar candle.

When you enter the market on a pin bar pattern, you should place your stop loss order right above/below the longer candlewick of the pattern. The distance between the entry level and the end of the longer candlewick is the approximate distance that should be allowed for the trade to work.

Make sure you are not using the exact high/low of the wick when placing the stop loss order. As a best practice you should leave some additional room beyond that to avoid getting caught in a stop run. We can assume that If the price goes beyond the longer candlewick, then the pattern is considered unsuccessful.

Take Profit in Pin Bar Trades

You now have some ideas on how to enter the market on pin bars and where to put your stop loss. So the next logical question becomes “Where should we exit our trade”. And that is what we will look to answer now.

Measure Distance based on the Size of the Pin Bar – Trades can use this approach for exiting candle pattern based trades. You can use one, two, or three times the size of the pin bar to determine the target. It is up to you which multiplier you would like to use in your own trading program. However, whatever you decide on when you build your pin bar strategy, make sure to use the same target approach for every trade – one, two, or three times the size of the pin bar. Also, keep in mind, that the bigger the target is, the lower the success rate will be, and the lower the target is the higher the success rate will be.

Use Price Action Rules – This approach involves applying simple support/resistance rules, in a combination with chart and candle patterns. Why exit a trade, where the price is still trending in our favor? If the price breaks a crucial support during our long trade, this can be a clear sign that we should close the trade. Also, if you spot another reversal candle pattern when the price is trending in your favor, you might want to close your trade at that time. The are many options available for the astute price action trader to manage their pin bar trade.

A Pin Bar Trading Strategy

Now we look to combine all the rules we discussed above to create a coherent trading methodology around the pin bar setup. Our pin bar trading system will start with opening a trade after a candle is closed beyond the smaller wick of the pattern. The stop loss will be located beyond the longer wick of the pattern. We will use price action techniques for determining the right time to close the trade. Have a look at the image below:

Let look at the EUR/USD chart above. The graph starts with a price decrease. Suddenly we see a bullish pin bar candle on the chart. The lower candle wick goes below the general price action. Therefore, we confirm the authenticity of the pattern.

The next candle which comes after the pin bar closes above the upper wick of the pattern. This is the right moment to open a long trade based on our pin bar trading plan. The price increases afterwards. Notice that on the way up, the EUR/USD creates a clear support level (blue line). If the price breaks this support downwards, then the trade should be closed based on the price action rules.

The support manages to hold the pressure of the price and the EUR/USD makes a new bullish run. At the end of the second bullish impulse we spot a Harami Reversal candle pattern. This formation could likely reverse the bullish trend which came after the pin bar pattern. Based on this price action, we might feel that this would be the right moment to close.

Let’s now illustrate a bearish pin bar trade example:

Again we have a EUR/USD chart above. The chart starts off with a bullish price move, which ends with a bearish pin bar candle formation. The longer wick of the pattern goes above the general price action, which confirms the authenticity of the candle.

The next candle which comes after the pin bar is bearish. As you see, it closes right below the tiny lower wick of the pin bar. This creates a short signal on the chart based on our rules.

Subsequently the price moves in the bearish direction. After the rapid decrease the price enters a consolidation phase, which resembles a falling wedge chart pattern. This figure has a strong bullish potential in case the upper level of the wedge gets broken. Therefore, the upper level could be used as an exit signal in this case.

Notice that the price action creates a bullish pin bar candle pattern inside the wedge. Although the longer wick goes below the price action, we should disregard this pattern, because it is formed during price consolidation.

Later the price action closes a candle above the upper level of the Falling Wedge. This creates a strong bullish signal on the chart. In this manner, we could decide that this is the right moment to exit the trade.

Let’s now go through a final pin bar trading example:

The image above displays the chart of the USD/JPY Forex pair. We see a bullish trend, which ends with a bearish pin bar candle pattern. Although the body of the candle is located below the previous three, the longer candlewick goes above the general price action on the chart. This confirms the presence of a valid bearish pin bar on the chart.

A couple of candles later the price action breaks the lower candle wick of the pin bar, which creates a short signal on the chart. Based on the entry rules, this is the right moment to sell the USD/JPY Forex pair. Soon after the price begins to move downwards. On the way down, one of the trend corrections creates a resistance area, which could be used for closing the trade. However, this resistance stays untouched and the trade should be held further.

The price continues the decrease with an even sharper pace. At the end of the second bearish impulse, the price action enters into a consolidation phase. Note that the consolidation resembles a symmetrical triangle. The upper level of this chart pattern could be used to close our short trade in this case.

Notice that at the end of the triangle formation, the price action creates a bullish pin bar pattern. The longer wick goes below the general price action, which means that the pattern is significant. This candle could be used as an early exit from the short trade. Otherwise, the exit signal comes when the price action closes a candle above the symmetrical triangle on the chart.

Conclusion

  • The pin bar candlestick pattern is one of the most powerful and easily recognizable candle patterns available.
  • The pin bar has a small body, a long candle wick which is at least twice the size of the entire candle, and a small candle wick opposite the long candle wick. The Hammer and the Shooting Star are types of pin bar candle patterns.
  • The name “Pin Bar” comes from “Pinocchio Bar”. The explanation for this is hidden in the price momentum, which pushes the candle to a rebound, creating a long candlewick. Traders attempt to catch this reversal pressure, which is likely to be stronger, if the wick of the pin bar is longer. In this manner traders say: “The bigger the nose (wick), the bigger the lie (the reversal)”, which refers to Pinocchio.
  • There are two types of pin bar candle patterns:
    • Bullish Pin Bar – It has long lower candle wick, small candle body and a small upper candle wick.
    • Bearish Pin Bar – It has a long upper candle wick, small candle body and a small lower candle wick.
  • A valid pin bar is one, wherein the wick goes above (or below) the price action. The highest probability pin bars are reversal signals that come after a prolonged price move.
  • A false pin bar is one wherein the long wick doesn’t stick out from the recent price action. Other pin bars which should be avoided are ones that occur during tight range bound conditions.
  • A Pin bar strategy could be traded the following way:
    • Identify a valid pin bar.
    • Open a trade in the direction of the pin bar when a candle closes beyond the smaller wick of the pattern.
    • Put a stop loss beyond the longer wick of the pin bar.
    • Use a multiple of the size of the pin bar as a target, or apply simple price action rules in order to exit the trade.

Listen UP.

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