The Pin Bar is a popular forex strategy based on a particular candlestick pattern that can be used on longer time frames of one hour, four hour or daily charts. The best pin bar strategies (click here for more information on that) are the ones which confirm the trends signaled by support and resistance levels, trend lines, Fibonacci retracement levels or any other technical indicator.
Martin Pring was the first to coin the term ‘Pin Bar’ pattern in his book on Price Patterns. He discussed a candlestick formation, which he coined as the ‘Pinocchio Bar’. The bar has the potential to offer a highly reliable price action (more info) signal indicating a reversal of an ongoing trend, but only if identified and traded properly. Here is a picture of a pin bar.
An easy way to understand the concept of pin bars (reference) is to have a look at a pattern which has three components. While the first one is called the left eye, the second one the nose, the last one is called the right eye. The left eye is a bar up for a bearish pin bar pattern and down for a bullish pattern. The nose bar opens and closes inside the left eye and its high protrudes much more than the left eye’s high in case of a bearish set up.
In case of a bullish scenario, the low of the nose protrudes much more than the low of the left eye. The open and close of the nose bar should be located in the bottom ¼ of the bar for a bearish scenario and in the top ¼ of the bar in a bullish scenario. The actual trading happens at the right eye.
A good pattern set up occurs when strong support/resistance levels are formed either behind the eyes or near the point of the nose. The accuracy of this pattern improves as we incorporate strong support or resistance levels in it.
Bullish and Bearish Pin Bar Set Ups and Exit and Entry Options
A bearish reversal pin bar can take the shape of a shooting star or a long inverted hammer or a long doji or. The bullish reversal pin bar formation can take the shape of a long dragonfly, a long hammer or a long doji.
The pin bar strategy identifies aggressive entry options as positions when the right eye price falls behind the close level of the left eye. Similarly a conservative point of entry is below the nose bar in case of a bearish scenario and above for a bullish set up.
The exit strategies based on the pin bar methodology call for setting up of a conservative stop loss behind the support/resistance level that is located behind the eyes. A conservative investor may set up a stop loss immediately behind the nose bar. But this may restrict the reward/risk ratio.
A conservative take profit can be set immediately after the left eye low in case of a bearish set up and immediately after the left eye high for the bullish set. In contrast, an aggressive take profit level can be established at the next support level in case of bearish positions and the next resistance level for the bullish positions.
Is a Pin Bar based strategy always successful?
Not necessarily. Traders need to understand that pin bars are powerful reversal signals when they form in the correct manner and location (more reading here). Pin bars are created at various levels, but all of them are not equal. Also successful trading occurs only when trading decisions are based on the best pin bars.
The body of a pin bar must not be more than 20% of the measurement of the body to the tip of the wick. Also, the nose should not be very long. A perfect pin bar is one which has a very long wick on one side and small or no wick on the second side.
Another factor to be considered before choosing a pin bar for deciding your trading strategy is the location of the pin bars. Never consider the pin bars that occur in the middle of consolidation or a sideways market. We should always look at pin bars that form at the top and bottom of moves.
Another critical aspect of pin bar strategy is to make sure that a pin bar forms at a key area of support or resistance as identified through common technical analysis. They should be confirming a price reversal.
So the best way to trade a pin bar is to combine the pin bar with a resistance to mark a top reversal or to match the pin bar with a support to mark a bottom reversal.