Pin Bar Tutorial
An underlying tenet of discretionary price action trading is that historical data can be utilised to help gain a directional bias for a given instrument or asset class. In fact proponents of this approach believe the interpretation of price movement remains roughly the same as long as a sufficiently liquid instrument is chosen.
Look at enough financial market charts and you will notice how a specific candle pattern often marks the prominent swing high and lows. The candle in question has a long wick and small real body; this is called a Pin Bar Candle Reversal. If used correctly and played in the right context this is amongst the most powerful reversal patterns out there.
This Pin Bar Tutorial will focus on the price action setup and discuss what exactly makes a great Pin Bar reversal – and a not so great one. We will also look at where we want to find these patterns because location can often be the deciding factor between a good Pin Bar Reversal or a mediocre one. We will also discuss areas that a stop loss can be placed when trading pin bars.
What Is A Pin Bar?
– The Pin Bar body should be small with a large wick.
– Depending on the shape it will be a a Bullish Pin Bar or a Bearish Pin Bar.
Bullish Pin Bar
Bullish Pin Bars have a small body and a long protruding wick underneath. This kind of candle comes after price is pushed lower by bearish market participants and is subsequently bid up as lower prices are quickly rejected. The fact that price closes near the top of the candle shows the bulls are taking control over the period of time represented by the candle. If we are looking for the ideal bullish Pin Bar it would have the candle close higher than the open with hardly any wick near the top part of its body; this is showing strong bullish sentiment. See the USDCAD example below for a great bullish Pin Bar.
We look for the exact opposite when searching for a Bearish Pin Bar.
Its one thing looking for perfection in the shape but the location is equally, if not more, important so there is an element of discretion needed when deciding if the shape is close enough.
– Bullish Pin Bar reversal patterns are synonymous with Japanese Candlestick patterns including the Doji, inverted hammer and shooting star formation.
Charts Showing Pin Bar Reversal Setups
We will now look at a few charts showing different Pin Bar reversal scenarios. Some of these were taken from the blog and were at one time featured in our analysis update section.
This first example shows the kind of Pin Bar I look for. The following characteristics are in place:
- The size of the Pin Bar wick is greater than the preceding price action. In my opinion this makes the reversal more meaningful rather than a small correction.
- This candle is seen on the weekly chart which is less prone to noise caused by tier 2 and lower event risk.
- Space is seen above the candle, with no immediate resistance to trade into. Context is everything when we look for price action setups including Pin Bars.
The chart above shows what I would consider to be a near perfect setup. We will now look at the dollar index and a weekly timeframe Pin Bar candle from earlier this year. This shows the Pin Bar in a ranging market.
Anyone reading this blog on a regular basis will have noticed that round numbers are featured heavily (see separate tutorial). This is a great example of the greenback posting a Pin Bar reversal at a round number level.
- The USD-X moved through the 80.00 round number area and subsequently retraced back under the psychological level.
- The move above 80.00 would have been seen by some traders as a breakout scenario. As price retraces they are trapped in long positions. If enough traders are caught on the long side of the market, and need to liquidate their positions, they have to sell – and price potentially moves lower.
- Price formed a Pin Bar on the weekly chart. This higher timeframe pattern encapsulates a full weeks price action and is therefore less prone to noise than lower timeframe chart. In my opinion this gives a better signal than an intra-day chart and gives the trader more time to manage the trade.
- It is also interesting to note that this Pin Bar car after a bullish engulfing candle had marked the ultimate swing high on the chart. Price action had once again marked the turning point.
This one is not as convincing as the first one (UDSDCAD) as it’s a smaller candle. This does not mean the candle will not work out but look at the down trend that precedes the candle… Compare this with the USDCAD candle size. Nonetheless, the Pin Bar did have the following elements in play.
- The currency pair had dropped to a 50% retrace of the previous move higher. This was aligned with 1.5800.
- Price has broken below, then pulled back to the 200 SMA – a popular moving average for many traders. Note that price did not close above the 200 SMA which could potentially be viewed as a sign of weakness.
- Price had moved strongly under 1.5800 on an intra-day basis but had then retraced higher and printed a bullish Pin Bar.
The following bullet points are a collection of additional notes relating to the Pin Bar.
- Advanced practitioners will sometimes look to trade a retrace of the candle but this can add additional complexity.
- Stop losses can sometimes be placed closer to the entry point if hidden behind areas of confluence. This can potentially lead to a higher risk reward but also more losing trades – discretion plays a part in this area.
- Sometimes a failed Pin Bar gives a good indication that the market sentiment is strong in a given direction. This can be difficult to trade though as it would involved selling near previous support or buying at previous resistance.
- Pin Bars are synonymous with hammer candles and other variants – its just another name for the same price action in many cases.
- These can be seen on all conventional timeframes but canals be constructed on non-standard timeframes by blending the price action i.e. 8 hour and 2 day.
- When looking at the close of bearish PinBar the close is not below the prior candle. That would make it a bearish outside candle (bearish engulfing). I personally have no preference between the two candle types though. The same is obviously true for bullish variants (but the price action is bearish).
- Candles formed with high volume are even more interesting to me, as it shows a great deal of market participants war involved in the move – thus adding weight to the scenario. Conversely a Pin Bar formed during a quiet time of the trading day would be of no interest to me.
- Always look at the surrounding price structure.
- Areas of confluence are preferred including round numbers, Fibonacci levels, and support and resistance.
- Even the best setups will fail sometimes. It is my opinion that You should always learn how to trade on demo with no money at risk.