Pin bars
A Pin bar is a very powerful price action signal, infact it is one of the most powerful price action patterns in forex training.
When traded correctly it can be an extremely powerful tool that should lead to high probability trades.
I believe the Pin bar strategy is the one to master as it is one of the most reliable price action signals and can be easily identified.
Pin bars can appear on all timeframes, when they form, they are telling us that price was rejected at a certain level. As price retracts away from that level and the candle closes at the end of the period, the pin bar is formed.
When a Pin bar appears on a chart it can be a great signal that a major trend is coming to an end and is about to reverse or that a major trend is about to resume. This will become clear below. So a Pin bar although great for identifying a reversal in the trend can also signal a continuation in a strong trending market.
Infact it is the context in which the pin bar forms (its neighbouring candles and the support and resistance zones left by earlier price action) that determine whether we trade the pin bar or not.
Depending on where this candle formed, there could be a good chance that the price will continue to move away from the rejected price as the subsequent candles form. This gives us a high probability set up, that could lead to a rewarding trade if certain other conditions are in place.
What makes a good Pin bar?
Note: The colour of the body is not important.
For the actual candle itself, the following describes a good pin bar candle:
- The smaller the body the better.
- The closer the body to the end of the bar the better.
- The longer the wick (or tail) the better.
- The pin bar should open and close within the body of the previous candle.
- The wick of the pin bar should protrude out from the surrounding price action.
- The wick should be at least 3 times the length of the body.
- The body of the candle should be at the lower 1/3 of the candle to be bearish.
- The body of the candle should be at the upper 1/3 of the candle to be bullish.
- The colour of the body is not important as long as it falls in to the criteria listed here.
So which pin bars should be traded?
Pin Bars are easily identified on the charts, so which ones should I trade?…….
Well not all of them, as all Pin Bars are not created equal. Once we have identified a good well formed Pin Bar on a chart there are a few things we need check for which could make our good Pin Bar into Top quality Pin bar which, if traded will give us a high probability of a successful trade.
You see we need to filter out the low probability trades and trade only the High probability set-ups when they appear. Eventually, as you spend a little time on the charts and gain experience, these high probability Top quality Pin bar trade set ups will jump out at you and you will know that they are the trades to consider taking.
The pin bars that are good to trade are the ones that coincide with key levels on the chart, often referred to as areas of confluence, these levels are the ones where something else is going on and could be any one of the following areas of confluence:
- An area of Support or Resistance – could be a Horizontal level or a diagonal trend line.
- A Fibonnacci retracement level – In strong trending markets, Fibonnacci levels can provide nice areas of confluence.
- A dynamic zone between the 8day EMA and the 20day EMA – in strong trending markets, Exponential Moving Averages, can provide a Dynamic support and resistance band which can in turn provide a nice area of confluence.
Should I be trading Pin Bars in Range bound or Trending markets?
Well either really. Pin bars can show us when a market is about to reverse in a range bound market and they can show us when a strong trending market is about to resume its trend after a pull back to value has occurred. See examples below.
Range bound Markets:
Below is an example of Pin Bars showing price reversing in a Range bound market:
We can see in the example above that the market is rangebound. Price is bouncing between 2 levels (Support and resistance). As price approaches the resistance line drawn at the top of the range, a nice Pin bar forms signalling price is likely to reverse, and it does.
Likewise, a fine example of a Bullish Pin bar at the support line drawn at the bottom of the range signals that price is highly likely to reverse again, and it does.
You can see here that with any Price action signals, patience is the key. We must wait until the candles close before entering a trade.
Trending Markets:
Pin bars not only signal the reversal of a major trend, they can also tell us when a major trend is about to resume after the price has ‘pulled back’ to an area of value.
In fact it is the pin bars that form with the dominant trend that can be the most reliable, purely because they are giving us a signal that the powerful dominant trend is about to resume after a period of price consolidation.
Below shows price in a strong up trend. Price moves up steadily before pulling back and firing off a pin bar. This happens over and over. As each Pin bar forms, an entry is signalled.
Below shows price in a strong down trend. Price falls steadily before pulling back and firing off a pin bar. This happens over and over. As each Pin bar forms, an entry is signalled.
In strong trending markets such as the examples given above, we would only consider taking a position in line with the current trend, unless we were approaching a key structural level. If price was approaching a key structural level we would stand aside and watch for price action signals at this key level to see if price reverses or continues.
Entry and Stop loss
For a Bullish Pin bar, set a buy stop above the high of the Pin bar with a stop below the tail of the Pin bar.
For a Bearish Pin bar, set a sell stop below the low of the Pin bar with a stop above the tail of the Pin bar.
Note:
Despite being one of the more reliable high probability Price Action signals, nothing is guaranteed, markets can reverse sharply due to events happening around the world and data releases etc. Sometimes your trade will close you out for a loss and others you will win.
However, being patient and trading only the high probability Pin bars, i.e. the ones that protrude from surrounding price action and form at an area confluence, we are going to dramatically increase the number of winning trades and cut the number of losing trades. Combining this with a strictly followed risk management technique and you will have a very powerful tool in your toolkit.
Important:
Risk management is the key to growing your account, without it, no matter how much luck shines on you, eventually your account will be wiped out.
There are 3 things here that will dramatically change the outcome of your trading decisions, they are:
- Only take the high probability trades, the ones we discussed earlier where the Pin bar has formed at an area of confluence.
- Use risk management to manage the amount you are prepared to lose on any trade. This amount should be a small percentage of your account size, generally no more than 1 to 2 %. It is something that should be adhered to no matter how promising a trade set-up is looking. I intend to add trade size calculator in due course.
- Have respect for money! – Draw some cash out of the bank, just 5 or 10 notes and look at it once in a while. It is too easy to forget the monetary value of the numbers on your spread bet account. What might look like a relatively small amount to you on your screen, could actually be the weeks shopping or a tank of gas.
Remember:
There is no need to lose large sums of money when learning to trade forex, so practice on a demo account until you can consistently grow that account before thinking of going live with a real account.