Price Action: Pin-bars

Pin-bar is one of the strongest and at the same time easily recognizable, candlestick patterns in a graphical analysis. However, many new Forex traders make mistakes while trading this model: they do not take into account the quality of the formed pin-bar, do not pay attention to its location and enter the trade incorrectly, i.e. they use market orders. How to recognize pin-bars and avoid the above mistakes you will learn from this lesson.

 

What is Pin-bar?

Pin-bar is one of the main models of Price Action. Its name comes from the name of a famous character Pinocchio from the tale by Carlo Collodi.

Let’s imagine that we have a chart. The trend is up and the price is increasing. Then you get a candle with a small body. And it has a small shadow from one side and a great big shadow from the other side:

This is not that other, as the pin-bar.

Pin-bar is a reversal pattern, implying a price reversal. This is a candle with a small body, a long tail from one side and a small tail from the other side. Wherein the body of the setup must be within the range of the previous candle, that is, from the point of High to the point of Low of the previous candle.

If its body was not in the range of the previous candle (as in the example shown below), we would not call it a pin-bar, as it does not conform to the figure’s characteristics:

How can we explain the appearance of this figure on the chart?

We watched price moving up. Then, there was a strong reversal on the candle, which later became a pin-bar. People were buying for a very long time, and then due to various factors, the price went in the opposite direction.

What will happen with the position of the players who put up orders to buy? They will lose their money as StopLosses will trigger. And that was the purpose of this reversal - Collecting of StopLosses of those who were buying.

Since this move was sudden, there were activated much more orders for sale which were put by the other traders waiting for such a situation.

And all this has led to the fact that the candle on the chart has got a long tail and a small body.

Now the buyers who have triggered Stops will begin to enter into sell trades, and those who have triggered pending sell orders will not rush to out of them because they already have a little in profit.

Thus, we can see the change of mood of the market, as well as the figure that is called “pin-bar“.

This is a reversal pattern, so in the future, we can expect downward movement. Namely, bearish candlesticks:

In order to take the pattern, we need the pin-bar that has a point of support. This should be an additional factor that gives us the right to assume that downward movement will happen soon. We need reference level, level of support or resistance, in order the pin-bar could push off it:

If there is no a point of support, then we will not use this pattern for opening of trades.

 

How can we enter the market by the pin-bar??

 

Entrance by pending order below the short shadow

Standard entrance by a pin-bar is performed by setting a pending order below the short shadow of a candle:

If the pin-bar appears in the opposite direction after the movement down, then put a buy stop pending order above the short end of the candle:

This classic method is based on the fact that if the price doesn’t change its movement, and will continue its active movement on the previous trend, our pending order will not be activated, and we will be able to delete it.

The second method: «Waiting for rollback by 50% of the candle»

In order to use the second method, we need to set a pending order about the middle of a candle:

It’s called a limit order. In this case, sell limit.

Pros of this entrance are the fact that we will get more profit as we will be able to enter by a more favorable price.

Cons are the fact that the market doesn’t have to do anything for anyone, therefore, the price doesn’t have to rollback to the middle of the setup. And if the order is not activated, we will not earn anything.

The third method: «Entrance by a pending order near the level»

Just to clarify that I use this method in my trading.

Set a pending order just below the level:

Please note that the level can be placed not necessarily on the very edge of the candle. It can be placed anywhere:

A pending order should be placed just under the level.

Which of these methods is better?

There is no clear answer which of the methods to enter is better. All depends on the situation. From my own experience I will add that if I am not sure about pin bar, I set a pending order just below the shade. If there is a noticeable level, then I try to set a pending order near it.

I don’t use the pullback by 50% in my trading because I am guided by the level.

Sometimes a pending order near the level coincides with the 50% level of the candle. But this is not a mandatory factor.

Not to confuse yourself very much, I recommend to use the classic method to enter the trade. Namely, we put a pending order just below the short shadow of the pin-bar. This will be enough for beginners at first.

Stop Loss

In any transaction, you should not forget about Stop Loss limits of potential losses.

Let’s say we put a pending order a little below of a short shadow of the candle:

This pending order is activated, and we have entered the trade, but we need Stop Loss. Why? We need it because the price may change its direction at any time without particular reason.

Even the most perfect setups will bring Stop Losses sometimes.

The classic method of setting a Stop Loss by a pin bar states that you should set stop-loss orders slightly above the long tail of a candle.

That is, this way:

I believe that it is better to set Stop Loss behind the level.

Just like this:

Why is this better? Because the Stop Loss, that is set behind the level, is more logically justified. It has great power and this decreases the number of pips that you put at risk.

In certain cases, it is possible to enter a trade by pin-bar with a very small Stop Loss. Provided, however, that the entrance to the market will be around the level and stop loss will be set just above the entrance, behind the level.

Such trades are more profitable, more pleasant, and generally bring only benefits for your trading account.

So in every trade, I try to set a stop loss as little as possible.

Take Profit

In addition to entering a trade, we must be able to exit of it.

The easiest way out is the exit on the next level of resistance / supports. This is the level which is in the direction of the price movement. In order not to sit in front of the monitor for hours, waiting for the moment when the price reaches its intended target, it is enough to set Take Profit in the right place:

If you cannot find the level on the chart, then you can multiply the stop loss by 2 or 3 and thus you will get the size of Take Profit.

Let’s say your Stop Loss is equal to 20 pips. Multiply it by 3 and get 60 pips:

Also, I would advise you to transfer the trade to break-even after two Stop Losses. If your stop loss is equal to 20 pips and the price passed 40 pips, then you need to move Stop Loss to the opening price of the trade. Thus, you insure yourself against a possible price reversal.

Another possible method of setting a take profit is a measurement of the length of the pin bar. The size of Take Profit is equal to the size of a pin bar candle.

What should you pay attention to when trading pin bars?

First and foremost, it is the best to enter by the trend.

Actually, the best option would be entering the market only by the trend:

Why?

Because trading by the trend increases the profitability of the trades. I think that you should agree with this.

As we discussed trading by the trend for several times, I think you should not have any problems with this issue.

If you really want to take a pin-bar against the trend, then it needs to be very “beautiful”. It should have a small body in the range of the previous candle and a long tail. You need to clearly and without a doubt see that this is a pin-bar.

In fact, we have a separate article about trading against the trend, where we discussed various nuances. I recommend to read it.

Overall, I would not advise taking pin bars against the trend, because it’s an unnecessary risk. Try to follow the trend always.

As I said earlier, we always look for reliance on the level.

And if the pin-bar’s tail forms a false breakout, it is a good sign for us:

Why is it a good sign?

After a breakout, the price has collected Stop Losses and pending orders that were on this level. It gives power to the setup. Therefore, if there is a false breakout of the level, it forms the tail of pin-bar that is the additional reinforcing factor.

There is a perception that the bullish pin bar must have a bullish body and the bearish pin bar must necessarily have a bearish body.

I have not seen the statistics which confirms this statement. In practice, there is no much difference. No matter what type of body the pin-bar has.

If the pin bar is bearish like in the screenshot above, and its body is bullish, then that’s fine and we shouldn’t fear this.

Don’t forget that there are random fluctuations on the market and if the body is small, the price may fall by 10-15 pips and the body will become bullish.

This is not the factor that you should think about.

There is another point about which you can find very much debate and discussion on the internet.

Should the pin-bar be highlighted on the chart?

In my opinion, it is not required and it is possible to enter by the pin-bar, if it is not highlighted very much. For example, in this area there is a pin bar, which is not highlighted, but as we see in the future, it works:

The only thing I want to note — patterns, which are well highlighted on the chart, work better usually.

So, if you want to take only the best signals, you should pay your attention to the bright setups, which are visible on the chart with the naked eye. But it’s not a 100% criterion. Anyway, it is impossible to predict which of them will be more profitable, while the chart will not begin to move forward.

There must necessarily be some movement before a pin-bar. There should not be any flet. If the signal is preceded by a flet, it is dangerous to take it.

USDJPY chart, which is in a flet for several months, demonstrates this nuance very good:

There were a lot of pin-bars in all directions for all that time. But they had not any effect.

Then there was downward movement, a pin bar appeared and then there was a sharp jump upward.

Hence we conclude that any noticeable movement should always precede this setup.

Keep this in mind and try not to risk in vain.

Examples of trading

Let’s look at some examples of trading by pin-bars.

For the first example will use the previous situation and consider how the pin-bar, which was preceded by flat, worked:

Again I remind you that before we had flat movement before. There can be a breakout in any direction after it, so it was possible to take this pin-bar, although it was against the trend.

Why? Because there is a noticeable movement, followed by the breakout of the level, and we have support on the round level.

The body of the pin-bar was under the level, so the entrance was carried out by placing pending order to buy just above the top point of the pin-bar:

As there is the level, the confirmation is required that the price is stuck behind it.

I would recommend setting Stop Loss just below the point of low of the previous candle:

If you put stop loss after the long-tail, then it would be a very big, and it’s not in our interests.

I would set TP on the border of the previous flat. Because we don’t know whether it continue the movement upward or the price will start to move zigzag in this corridor again.

Thus, TP in this trade would be 127 pips and stop loss of 68 pips.

Just want to note that this was an example of a complex situation, which we won’t meet on the chart every day.

Let’s move on to the next example, but we’ll take simpler situation now.

We see a long flat, where we do not observe the clear trend. Latest movements indicate bullish mood, after that a pin-bar appears, and then another one next to it.

What would we do here?

Since the upper bound of the pin-bar is close to the level, it is logical to place a pending order just above the high point of the pin-bar:

Please note that it does not much stand out on the chart, but this is not a critical factor to enter.

We could set SL after the tail according to the classical method, and then move it closer to the tail of the new pin-bar:

Thus, we would slightly reduce the risk in this trade.

It would be logical thing to get out of trading at the psychological level of 101, which could be an obstacle:

Let’s consider another example of a pin-bar by the trend:

We see that it relies on a weak level. In this case, I would enter the trade near it with limit order:

I would set SL below the Low point of our pin-bar:

It is close to level, so all would happen here according to the classical method of SL setting.

Once the next candle was formed, we could move SL just below its low point. It would have reduced its value, and our costs, consequently.

I would exit the trade after Gap:

We know that Gaps tend to close. So I would not take unnecessary risk.

Even if we would exit at Gap, SL would be equal to 60 pips and TP would be equal to 490 pips.

It would be a pretty good deal.

Another trend pin bar on the daily chart for favorite EURUSD pair.

This figure has a support, the level is a short distance from the pin-bar.

But it’s worth noting that pin-bar rely on the level by its tail only, so, in this case, Stop Loss we set it after the support level:

Stop loss of the trade would amount to about 54 pips.

As the pin-bar is not too clearly highlighted on the chart, we would be able to enter just above the High Point:

I would set TP at the top point, right here:

Despite the fact that stop-loss was large in size, TP would allow us to exit a trade with profit.

Conclusion

In conclusion, I would like to advise you to pay close attention to pin-bars. This figure is one of the strongest in the arsenal of Price Action.

Do not enter the market against the trend, you should enter by the trend or after flat when there is the noticeable movement that preceded the pin-bar.

Set Stop Losses, keep in mind the levels and don’t forget to exit with a profit.

Take care, Michael

ForexTraderPortal.com