Pin bar trade management strategy

Pin Bar Forex Trading Strategy.

The pin bar trading strategy , is a price action reversal trade setup that can be used to make money from the markets when used correctly. In this lesson we will explain what a pin bar is, and how to use one when you see it in the correct manner to setup profitable trades in the market.

What is a Pin Bar & How Do You Define It?

We all know the story of Pinocchio – the boy whose nose grew longer anytime he told a lie. A pin bar is also called a Pinocchio bar because it is telling us that the market is lying and the length of the pin indicates the elongating nose of Pinocchio.

As the market price moves in the direction of the trend up to a certain level, it suddenly retreats all the way back to near the opening price. Thus, it lied as to where the price was headed.

A pin bar reversal pattern, is made up of a long wick and a small body, which could extend from above or below the body. They are easily identifiable on your charts with a little practice.

The rejection of price direction by traders is what causes price to go back towards the opening price of that candle, indicating that the traders in the previous trend have run out of steam and that counter-trend players have come in.

What Are the Characteristics of A Pin Bar?

Here are some easy to follow rules to identify pin bars on your charts;

Wick must be at least 3x the length of the body of the candle. Wick ideally is similar same size as the previous candle (bigger = better). The closing price must be located within the length of the preceding candle (i. e. not gapping). A smaller body and longer wicks are preferable Body must be on one end of the wick, essentially looking like a mallet or hammer.

How To Trade a Pin Bar Setup.

The first step is to confirm that the pin bar in question matches the characteristics described above. To do this, the trader must wait until the candle in question has closed. This is the only way the candle can be evaluated to see that it is a true pin bar.

The next step is to make sure that the pin bar has formed at the bottom or top of a trend, ideally at a key support or resistance level. If it forms in a range-bound market, it is rarely of use unless at the range highs or lows.

But if the pin bar forms at the top of a trend and this area corresponds to market resistance, this is a very good setup for a short trade. Similarly, a pin bar which forms at the bottom of a trend at an area of support is a good setup for a long trade.

Fig2a: Long Entry Setup for Bullish Pinbar on Support Level.

Entry and Stop Loss Placement.

What are the best ways to enter the trade as well as set stop loss and target settings for the trade?

The best bet for an entry is to wait for the open of the next candle to initiate the trade. As much as possible, only enter trades where the pin bar has formed at the support or resistance level so as to strengthen the signal. Use market orders for the trade.

Trade signals that occur on longer term charts tend to be more reliable, but take more time to mature for often the same reward to risk ratio.

One entry method discussed has been the 50% retrace entry, but statistics show this to be a highly inefficient method.

Stop Loss/Take Profit.

Place the stop-loss above or below the wick of the candle depending on the time frame chart you have chosen. Part of the reason why this trade is setup using support and resistance levels is so that a trade that moves against the trader will most likely halt its drawdown at the key support/resistance before resuming in the trader’s chosen direction. As such, stop loss levels should be set below the support for long trades, and above the resistance for short trades. The risk management profile for the account as well as the risk-reward ratio will determine the number of pips used as stop loss. Aim for a minimum reward to risk ratio of 1.5:1.

Take Profits should be set as a whole to the nearest key level ahead of the trade. On a daily chart, this could translate into a target of 150 pips for every 100 pips risked. Better reward to risk ratios are seen when the trades are properly screened as follows:

a) Pinbars with long wicks and smaller bodies.

b) Closing price as close to key level of support/resistance as possible.

The pin bar setups should be practiced on a demo account before being applied to a real money trading account. But as a whole, if you can learn to add this price action setup to your arsenal, then you will find yourself making really good reversal trades and high probability setups when you take the price action, setups and context into account.

The Pin Bar Reversal Trading Strategy.

Updated: September 21, 2017.

This wouldn’t be a Forex website if it didn’t have a good article about the classic pin bar pattern.

Candlestick reversal signals are some of the most powerful and abundant signals used by price action traders – the most common of them being ‘The Pin Bar’.

Pin bar trading is generally the backbone of most price action trading systems used in today’s Forex markets.

I work with a different flavor of pin bar, which I call a Rejection candle – which provides more trading opportunities, and a more up to date, modernized view of the reversal pattern.

First, let me talk about the classic pin bar, then move on to explain how the Rejection Candle is different, and better.

The Anatomy of a Pin Bar Candlestick.

The Pin Bar candlestick is made up of from a specific layout of the following 3 important focal points…

The open and closing prices are pretty self explanatory; If you don’t know how read charts yet, please just out the following chapter – Understanding Japanese Candlesticks.

The most characteristic feature of the pin bar the ‘nose’. Pin bars have a long nose (aka candle wick) which protrudes out of one side of the candle body.

To qualify as a pin bar, the open and close must be situated at one end of the bar’s range, and the nose of the bar must make up at least 2/3’s of the whole bar’s range. The general rule of thumb is – the longer the nose of the pin bar, the more powerful the pin bar signal.

A Little History About The Pin Bar.

Martin Pring was the first trader to notice this pattern on the charts, and in fact, ‘pin bar’ is short for Martin’s original term for the bar formation – ‘The Pinocchio bar’.

If you remember the childhood stories – Pinocchio was a wooden doll that was brought to life by his creator, and every time Pinocchio told a lie, his nose would grow larger.

The analogy of Pinocchio tied in perfectly with Martin’s observations, because a pin bar is broken down into 2 moves.

The first par of a pin bars formation occurs when price moves from position X to position Y. Position X isn’t generally anywhere important, but position Y could be a strong technical point on the chart, like a support or resistance level, a weekly turning point or even another focus point.

This initial move draws in the ‘trigger happy breakout traders’, who love to jump in with the price momentum. Sometimes the X -> Y price move may even give the illusion that a major breakout is occurring.

Phase 2 of the pin bar creation happens when this initial X -> Y movement is not really the markets true intent, the charts were ‘telling a lie’. Price then springs back from position Y to somewhere near its original position X.

Just like Pinocchio, the bar grows a big nose as the ‘lie’ is revealed on the charts – trapping those breakout traders into bad positions.

Take a look at the bar chart below. You can see the two phases of price movements which are responsible for printing the pin bar on the chart.

How Pin Bars are Used in Trading.

Pin Bars are one of the most powerful tools a trader can have in their price action arsenal. They form very regularly and can be found across all time frames. The pin bar’s core purpose to help the trader identify potential reversals in the market. When pin bars form, it is a good sign the market is ready to move in the opposite direction.

Price action always tells a story. The story of a pin bar is is one where price moved to an area on the chart. The move is rejected by the market, and pushes price back to its original point of origin. Sometimes even beyond if it’s a good signal. Working with the logic of the rejection principle of pin bars, we can use them to:

Capture potential tops and bottoms to price movements Identify breakout traps that can lead to powerful price reversal moves Position into trending environments at excellent prices.

Rejection Candles.

When Pring first named the Pin bar – the majority of traders were using bar charts. These days traders prefer candlestick charts because they are easier to read, and are more aesthetically pleasing. The candlestick equivalent of a pin bar can carry many names – but here at The Forex Guy we call them ‘Rejection Candles’.

Pin bars and Rejection candles are almost identical in nature. But traders tend to use the term ‘pin bar’ when referring to candlestick charts, which is technically not correct. It also doesn’t sit will since I am OCD about getting things right 🙂 I don’t like to call a white cat black, and I try not to call a candlestick signal a ‘bar’.

I call the ‘rejection’ part of the candle the ‘wick’ or the ‘tail’ of the candlestick. A Rejection Candle will have a large wick just like it’s cousin – the Pin Bar’s.

For a candlestick to qualify as a Rejection Candle it must have the following attributes.

The open and close price of the candlestick must be situated at one end of the candle (not in the middle) The wick of the candle must protrude out of one end of the candle body. There must not be any large wicks sticking out both ends of the body.

Depending on which way the wick or nose produces from the Rejection Candle (or Pin bar signal), will determine whether it’s a bullish or bearish signal. I like to think of the signal as an arrow on the chart. Imagine the body of the candle is the arrow head. The wick or nose is the arrow body and the arrow points towards where price wants to go.

Here is an example of how a bullish Rejection candle points towards higher prices.

Notice the bearish rejection in the chart below. See how the wick of the candle protrudes upwards creating that imaginary downward pointing arrow, signalling price wants to move that way.

Identifying High Probability Trades Using Rejection Candles.

Rejection candles, or Pin bars, form quite often across all the time frames – but that doesn’t mean all rejection candles are ideal trading signals. If you traded every single Rejection candle you would most certainly end up losing money – so it is very important to narrow down the signals that have a higher probability of working out in your favor.

To quickly improve our chances of success we trade Rejection Candles mostly from the Daily time frame (sometimes the 4 hour). Anything lower than the 4 hour time frame significantly reduces the quality of the signals. By sticking with the higher time frames we can immediately improve our odds of success – and that really goes for most Forex trading strategies.

To further improve the effectiveness of rejection candle trading, it’s best to trade rejection candles that form at important support and resistance levels on the daily chart.

Important support and resistance levels dominant on the daily, or weekly time frame are generally the key turning points for price in the market, especially those from the weekly time frame. Combining these important levels with Rejection Candle or Pin bar signals, you exponentially improve your chances for a successful trade. The odds are in your favor simply because market history repeats itself. If you study pin bars and rejection candles in your Forex historical data – you will see they continuously produce the same response from the market.

A bullish rejection candle forms off an important support level – signaling to price action traders that higher prices are likely to develop in the near term.

A bearish Rejection Candle forms at an important resistance, tipping traders off to bearish movement before it happens.

Here is an example of how Rejection Candle signals can be great reversal signals in ranging markets…

Here is another example of another ‘thick bodied’ bearish rejection candle range setup that was discussed in the War Room…

Notice how the rejection candle had a thick bearish body it to, unlike the common pin bar which only had a small range it its body. These thick bodies give the signal a little bit more ‘oomph’ and tend to work out much better. Check out what happened next…

As you can see this rejection candle was able to give a price action trader the early warning sign needed to position into a bearish trade BEFORE the actual sell off occurred. This is a good example of how powerful price action trading really is.

Trading Rejection Candles Inside Trending Markets.

Rejection candles also work great in trending conditions as well. I know we said they are ‘reversal’ signals but if you think about it, reversals occur with in a trend. Rejection candles are very good leading indicators to let price action traders know when a counter trend movement has terminated. These counter trend moves push prices into what we call ‘hot spots’ where the price is right for positioning into a trend.

“Buy the dips and sell the rallies” – Have you heard this saying before?

Rejection candles that form at the dips and peaks within trends can offer very lucrative trading opportunities…

Check out the chart below. The USDCAD has printed a bullish rejection candle. Can you guess where this market might be heading.

Video: live rejection candle trade I took on the EURNZD daily chart…

To Summarize.

It’s very easy to see why Rejection Candles and Pin Bars have become one of the most popular tools used by price action traders in today’s markets.

Rejection Candles are very powerful candlestick signals, and coupled with the right money management plan you can really do well. Rejection Candles produce excellent returns for price action trader, tip us off to moves before they happen and give us the framework to build a logical trade position from.

Rejection candles (and even pin bars) are easy to identify – they don’t take much effort at all to spot a great trading opportunity, especially when used with our Forex trading strategies.

If you would like to continue learning everything there is to know about Rejection Candles like; rejection candle entry strategies, stop loss placement, money management for rejection candles and even filtering out good vs bar rejection candle trade signals – the Price Action Protocol trading course inside our Forex Price Action War Room is going to be a - perfect - fit for you.

Forex junkie & price action trading specialist!

Here I share my knowledge & experinces with technical strategies, focusing on swing trading, and breakout trading.

I am also obessed with trading psychology, and my new area of research - data mining & quantitative analysis.

(VIDEO) The Forex Pin Bar Trading Strategy Revealed.

The Forex pin bar trading strategy is by far my favorite price action pattern. In this lesson we’re going to cover what makes a pin bar a pin bar, how to know if a pin bar is worth trading as well as entry and exit strategies. As always, the term ‘bar’ is interchangeable with ‘candlestick’, however the common term has always been pin bar, not pin candlestick.

Video Transcription.

The most common question I get when it comes to pin bars is how do I know when to trade one and how do I know when to stand aside. So in order to show this I’ve got a few examples set up. And the first pin bar I wanna take a look at is gonna be this bearish pin bar here. Now the first question you always wanna ask, whether it’s a pin bar or an inside bar or any strategy for that matter, is why am I trading this? What odds are in my favor? Because we all know that stacking the odds in your favor is really what it’s all about. That’s what makes you consistent.

So let me ask you, would you trade this pin bar? And you should be answering with well, I don’t know. I’d have to see what happened previously to know the answer to that. So let’s do that. If we zoom out here on the daily chart we can see that we’re clearly in an uptrend. We’re making higher highs followed by higher lows. So this bearish pin bar here I can already tell you would be no good because I don’t wanna get short in a market where we have this kind of upward momentum.

So if we move on to the next pin bar we come to this bullish pin bar here. And unlike the last one, this one is obviously with the trend. We also have our two moving averages that are providing dynamic support. The pin bar tail is also nice and long so that’s also good. But there’s one other factor here that really gives credence to why this is a good setup, and again we have to look back and previous price action. So if we draw our horizontal line we can see that this level acted as resistance previously. We then broke through this level on this bar, retested that level as support which held and price was rejected off of it forming a pin bar. This is exactly what we wanna look for.

So resistance broke through, rejected, forming a pin bar. We’re with the trend. We have our moving averages. It’s a well-formed pin bar so this would be a valid trade setup.

Now there’s two other pin bars on here that are even better trade setups and I’ll show you why. But first let’s identify those pin bars and those two are right here. Now these pin bars also, just like the last one, also have the momentum in their favor. We have the two moving averages. They’re also well-formed pin bars with nice long tails. But there’s one other factor here that really makes these two pin bars a great setup and that is this key level. And the reason I like this level better than the last one is simply because we have three touches.

So we touched this level three times. We broke through it on this bar. We then immediately formed a pin bar and this is exactly what we wanna look for. So let me just compare these two pin bars with the last one to drive this point home.

So the last one we had one touch off of this level, we broke through it and then formed the pin bar. So we had one touch on this level. Over here we had three touches, we broke through and then formed a pin bar. So any time you have three touches it’s gonna be a stronger level than just one touch. So although this was a valid trade setup you can see the price did retest this level once again before breaking through whereas up here as soon as we broke through this three touch level we took off for about 300 pips.

Before getting into the actual Forex pin bar trading strategy, we need to know the parts that make up a pin bar so we can easily identify them.

What is a Pin Bar?

Let’s start with the “tail” of the pin bar, which is its defining characteristic and also sometimes called the “wick” or “shadow”. The tail of a pin bar should be at least 2/3 the length of the entire bar. The longer the better, but it must make up at least 2/3 of the bar from end to end. Notice in the image to the right, the tail is about 3/4 of the entire bar, so this qualifies.

The “body” of a pin bar is also important as it represents the open and close of the pin bar. The open and close should be close together; the closer the better. The body should also be close to the end of the pin bar. Notice how close the open and close are to the nose of the pin bar in the image.

Last but not least, the “nose” of the pin bar. While not as important as the tail or body, the nose is important only as it relates to the tail and body. This is because if the tail is at least 2/3 of the entire bar and the body is small, then the nose should also be relatively small. Also know that a pin bar doesn’t need a nose to be a pin bar. Sometimes it’s non-existent if the open or close occur at the extreme end of the pin bar.

Here’s a short video explanation of the characteristics of a pin bar. I also go into details about what makes this candlestick pattern such an effective price action strategy. Enjoy!

Three Types of Pin Bars.

There are two main types of pin bars as it relates to price action patterns that are taught in my price action course. Most traders assume the pin bar is simply a reversal pattern, and it is, but there’s another way to trade pin bars that I’ll explain shortly. First, let’s look at the more common way to trade pin bars as a reversal pattern.

The reversal pin bar (above) is best played in a ranging market or on a pullback within a larger trend. Let’s look at both in action.

Below is a great example of a pin bar that formed after price broke through support and then retested it from the other side as resistance. This is actually a pattern that’s still taking shape as I type this.

Now for the other type of reversal pin bar, which can be found in a ranging market.

So far we’ve seen pin bars that form on pullbacks as part of a larger trend as well as pin bars that form in ranging markets. Now let’s look at the less common way to trade the pin bar, as a continuation pattern. The differentiating factor here is that a pin bar continuation pattern doesn’t have a pullback (or very little) relative to the examples above.

The key to this pattern is that the pin bar must form in the direction of a trending market. Notice the pin bar just in front of the pin bar that I’ve identified in the chart above, the one that’s facing the other direction. It too is technically a pin bar, however it’s going against the trend, so it would not make for a good trade. Here’s a zoomed out chart of the same setup to see what I mean…

I wanted to put this chart up for three reasons.

To show that our pin bar would have given us a nice gain because it’s well-formed and in the direction of a strong trend The first pin bar that formed in the chart above was against the trend, so it would have been a “no trade” for us The reversal pin bar I pointed out in the chart above is technically perfect, however it too would have been a “no trade” for us. If you said because it too is against the trend, you’d be right! But there’s another reason why we wouldn’t have trade that reversal pin bar. Any ideas?…Okay, I give in, here you go 🙂

Pin Bars and Confluence.

Confluence simply means, the coming together of two or more “things”. For Forex traders, confluence means the coming together of, or combination of, two or more price action patterns, levels or indicators. Let’s look at the setup below, which is the exact same setup we looked at before, only this time we’ll start identifying our “factors” of confluence.

Let me clarify what’s happening here by identifying the various factors at work. To make this as applicable as possible, I’ll go through each factor as if I were doing my own analysis.

Well-formed pin bar rejecting previous resistance level, now acting as support Trend is clearly up The pin bar is rejecting the 8 day EMA, which is intersecting the horizontal support level No immediate resistance above the pin bar (it has room to run)

So there you have it, a simple pre-trade analysis using confluence factors. It’s really that simple 🙂

I should point out that #4 above isn’t technically considered a confluence factor, but clearly identifying support and resistance levels is an extremely important part of any pre-trade analysis.

You’re probably wondering what the two moving averages are all about. Well, I use the 10 and 20 period EMAs in my trading. I find that they help to quickly identify the trend and also act as dynamic support and resistance. As a side note, you might find that I don’t use them on all the charts posted on this site, but that’s only because I don’t want to unnecessarily clutter the price action patterns.

You are probably on to it by now, but I want to point out why that reversal pin at the top of the GBPCAD chart above doesn’t fit our criteria. So here it is…

In other words, we didn’t have the necessary confluence to consider this a worthy pin bar to trade. The pin bar above has everything going against it except that it is a well-formed pin bar. The two most important reasons why I wouldn’t trade the reversal pin bar above are:

It’s against the major trend There’s no resistance level to give me reason to believe that it is indeed a reversal point in the market.

That about wraps up confluence. Think of these confluence factors as your pre-trade checklist, similar to a pilot’s pre-flight checklist, only ours is a LOT shorter…at least I hope 😉

Entry and Exit Strategies.

Because there are a few different ways to get in and out of pin bars, and because this lesson is already pretty long, I decided to include pin bar entry and exit strategies in a separate lesson. But in order to get access to the link, you must answer the question below …okay, I’m only kidding, but I would appreciate it if you would take the time to comment below as I’m always interested to see what other traders are doing when it comes to pin bars. Thanks in advance!

Are you currently trading pin bars? If so, how do you trade them? If not, do you see yourself including them in the future? I look forward to seeing your comment below!

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Pinbar Trading System.

Pinbar Forex Trading System — a popular strategy for entering and exiting positions that is based on the particular candlestick pattern and the following price action. The Pinbar (also known as "Pin-bar" or "Pin bar" ) pattern was first introduced by Martin Pring in his Pring on Price Patterns.

Conservative strategy offers low-risk high-yield opportunities. No-loss rate is pretty high if break-even is applied. Rare occurrence. Timing is critical. Support/resistance is difficult to formalize.

Strategy Set-Up.

Any currency pair and timeframe should work, but longer-term timeframes (such as H4, D1 and W1) should work better.

Pinbar Set-Ups:

The pattern consists of three bars: the left eye, the nose and the right eye. The left eye should be a bar up for the bearish Pinbar pattern or a bar down for the bullish pattern. The nose bar should open and close inside the left eye, but its high (or low, for the bullish set-up) should protrude much farther than the left eye's high (or low). Both the nose bar's open and close should be located in the bottom (top, for the bullish set-up) 1/4 of the bar. The right eye is where the trading happens.

An additional condition for the good pattern set-up is the strong support/resistance level formed either behind the eyes or near the point of the nose. The stronger are the support/resistance levels you incorporate into this pattern, the more accurate it will be.

You can use the MetaTrader Pinbar Detector indicator to automate the Pinbar pattern detection.

Entry Conditions.

Aggressive entry option is to enter a position when in the right eye price retreats behind the left eye's close level.

Conservative entry point is below (above for bullish set-up) the nose bar.

Exit Conditions.

Conservative stop-loss can be set behind the nearest support/resistance level behind the eyes. A less conservative approach would be to set stop-loss to immediately behind the nose bar point (in this case, your reward/risk ratio may suffer).

Conservative take-profit can be set immediately after the left eye low (high for the bullish set-up). Aggressive take-profit level may be placed farther — to the next strong support (resistance for bullish positions) level.

Bearish Pinbar Set-Up:

This is an example of the aggressive set-up. The entry point (blue line) is positioned at the left eye close (price retreated for that entry). Stop-loss (red line) is placed at behind the point of the nose bar (in this situation, even conservative stop-loss wouldn't be hit, as the price pull-back during the right eye happened before the entry). Take-profit (green line) is set at the nearby support level and is easily filled.

Bullish Pinbar Set-Up:

This is an example of the conservative set-up. The entry point (blue line) is placed just behind the nose bar. Stop-loss (red line) is below the left eye. Take-profit (green line) is just above the left eye.

Use this strategy at your own risk. EarnForex can't be responsible for any losses associated with using any strategy presented on the site. It's not recommended to use this strategy on the real account without testing it on demo first.

Discussion:

Do you have any suggestions or questions regarding this strategy? You can always discuss Pinbar Trading System with the fellow Forex traders on the Trading Systems and Strategies forum.