Trading with pin bars is a popular direction for analyzing candlestick patterns, including Price Action. It you use it properly, you can make a steady profit. That is because this pattern is one of the strongest candlestick models in the Forex market.
Pin bar – is a reversal model. It indicates a change in the direction of movement of a currency pair. Visually, the pin bar looks like a candlestick with a small body and a big tail to one side.
Such a model is formed after several candlesticks closed in one direction. At the same time, the body of the reversal model is within the boundaries of the last candlestick – does not go beyond the High and Low boundaries. If this condition is not met, then the pattern cannot be defined as a pin bar.
In the screenshot above, you can see a candlestick that looks like a reversal model, but is not within the body of the previous candlestick. It is not a pin bar.
The direction of the reversal is always opposite to the long tail. The change in the price movement is confirmed by the next candlestick, which closes in a new direction.
When working with a pin bar, some traders use special terminology for ease of discussion of candlestick models:
To identify a pin bar on the charts, you can use the following criteria:
The patterns on the chart do not always correspond exactly to the characteristics described above. When trading, you can take into account the model if it has at least 3 pin bar signs.
Two rules are used to filter non-working reversal models:
When opening a position based on the formed pin bar, you need to determine the market exit point immediately. Otherwise, you can miss the moment and get a new reversal in an unfavorable direction.
On Forex, you can periodically encounter such a phenomenon as the collection of stop losses. For example, there may be such a situation:
In such a situation, large players capable of creating price fluctuations open positions in the direction opposite to the main movement. As a result, the currency pair begins to reverse and the stop loss of a large number of small traders is closed at a loss.
This is the collection of stops. Its result is the formation of a candlestick with a small body and a long tail on the chart– pin bar.
When buyers see that their stops are closing and the upward movement stops, they try to react to changes in the market situation and open sale transactions.
These actions form a candlestick after the pin bar. It is closing in a new direction. If there was an upward movement – bullish, then a bearish closure occurs. This is how a price reversal is formed.
When using a pin bar, you need to pay attention to the price level – it should be. If there is no level, it is not recommended to take a reversal pattern.
There are 2 common methods of opening a position when forming a reversal candlestick:
In both cases, the stop loss is set beyond the boundary of the long tail of the central candlestick. At the same time, a support or resistance level should be formed, from which the price bounces back.
The chart shows how the asset begins to move in the other direction, pushing back from the local high level. The reversal was formed in the form of a pin bar. This situation is also possible near the support level – the local low of the currency pair.
The exit from the market must also be done taking into account the levels. If the price starts to reverse at the point where it has already changed the direction of movement before, you need to close the position.
When an order is opened near the resistance level, it will be closed at the support level, and vice versa. That is, trading goes from level to level.
To enter the market, you can use the reversal moment after a strong impulse. If the currency pair has gone far beyond the support/resistance level, then there is a high probability of compensation for such a breakthrough. The reversal moment in such a movement is often in the form of a pin bar.
For convenient work with such impulses, vertical levels are displayed on the chart. With a growing trend, this level will be called a swing-high, with a descending trend – swing-low. You can understand that a reversal is formed exactly after a price breakthrough by the emptiness on the side of the candlesticks.
The pin bar strategy works better on large timeframes – from H1 and above. There are almost no false signals on daily and weekly charts.
One of the most convenient ways to enter the market when forming a pin bar model – is a pending order. If a bearish movement is expected, the position opening price is set below the shadow of the reversal candlestick. A pending Sell stop order is used.
If a bullish movement is to form, then a point above the shadow should be taken as a reference point. A pending Buy stop order is used. The advantage of pending orders is that they allow you to avoid losses in case of an incorrect analysis of the market situation. If the price does not reverse after the pin bar, the order is also not activated.
It is better to start the practice of pin bar trading with the classic variant – of placing a pending order slightly above/below the shadow of the middle small candlestick.
For more accurate work with the reversal model, you can use indicators and other terminal tools:
Reversal models do not always indicate a change in the global price movement. They can also be used for trend trading, subject to strong fluctuations in the asset value.
A pin bar will help to identify reversal points within a trend channel. In this case, it is better to open positions when the asset returns to the main movement direction. Trend trading on reversals gives you more chances to make a profit. When working against the trend, you need to take only the best pin bars that match the characteristics of that model as closely as possible.
For those who want to learn pin bar trading, we would like to recommend visiting our trader school. Here you will find a lot of useful information on proper trading, as well as various indicators, Expert Advisors and scripts that simplify the work with the market.