The pin bar trading strategy is a powerful price action pattern (checkout an explanation video of PA here) which communicates a strong rejection of buyers or sellers from the nature of the wick. Based on where and how the pin bar forms, it can either translate into a with trend trade or a reversal setup. The goal of this article will be to talk about some of the elements to define a pin bar, what elements are part of a strong setup, and how to trade them.
Although the traditional definition of the pin bar (Pinocchio bar) requires three bars, I will talk about the basic components of the pin bar, what are components of solid pin bars to look for, and how to trade them.
Basic Features of the Pin Bar
Generally, a pin bar is defined by having a small body and large wick. The large wick from an order flow perspective translates into a rejection of price at the top or bottom of the wick. This rejection can be significant, especially on the 1hr time frames and up.
Regardless, if the long wick is to the top side, then the bears were rejecting a bullish advance at the top price for the wick, while the long wick on the bottom side, equals the bulls rejecting a bearish price advance at the lowest price in the wick.
But the basic features of a pin bar are a small body and large wick. Ideally, a pin bar with a wick at the top is the highest point in the uptrend, while the pin bar with the wick on the bottom is the lowest point in the downtrend.
Bearish Pin Bar
A bearish pin bar as a whole will be at the top of an uptrend and upswing, with a large wick at the top and a small body. The strongest case for a bearish pin bar by itself would be for it to close bearish while the prior bar was a bullish bar. This communicates there was bullish momentum leading into the bearish pin bar, and that the pin bar closing bearish was able to reverse the bullish momentum of the prior bar, and close bearish. This adds to the reversal strength.
Bullish Pin Bar
Opposite to the bearish pin bar, a bearish pin bar as a whole should be at the bottom of a downtrend or swing, with a large wick at the bottom and a small body. The strongest case for a bearish pin bar by itself would be for it to close bullish while the prior bar was bearish.
This intimates to the trader there was bearish momentum leading into the bullish pin bar, and the pin bar closing bullish was able to reverse the bearish momentum from the prior bar. This helps to add to the bullish reversal strength of the pin bar.
Bullish & Bearish Pin Bar Patterns
As stated, pin bars are a favorite among price action trading enthusiasts. They demonstrate a clear dismissal or rejection of a price level. Be that as it may, not all pin bars are created equal as I have alluded to in my prior paragraphs. The goal of the following paragraphs will be to understand what a valid pin bar setup looks like, and how to trade them.
Example Of Pin Bar Strategy
Below is a daily chart of a few pin bar reversal setups on the EURUSD daily chart. You will notice that each of the pin bars represented a significant low for the pair before reversing back up.
Another example is the USD/CAD chart below. After a climb for 12 out of 15 days, At the very top of the trend we can see a bearish pin bar with the prior bar being bullish. The rejection was the largest rejection standing out on its own. From here, notice how price reversed strongly, selling off all the gains from the prior 13 days. You will also notice an inside bar two days prior to the bearish pin bar.
Trade Using Pin Bar Trading Strategy
As a whole, you do not want to just trade any pin bar that you see. If the trend is showing impulsive price action signs, and a small bearish pin bar forms at no resistance level, it would be more prudent to let this one pass and look for a larger rejection of price, perhaps a weakening of the price action prior to the pin bar to give you a confluence of signals.
There are two general entry methods for trading the pin bar;
- The buy/sell on break of the high/low of the pin bar
- The 50% retracement of the pin bar
In the first method, if you have a bearish pin bar at the top of a trend and at resistance, you can look to sell the pin bar on the break of the low of the pin bar, and target the next major support level, ideally looking for a target 2x your reward.
In the second method using the 50% retracement of the pin bar, you would enter on a pullback into the 50% retracement of the pin bars price action, and then target 2x the amount of your risk.
This is just some basic methods to enter using the pin bar method.
Pin bar setups can be a particularly productive price action strategy to trade in your arsenal of forex rule based systems. The best pin bars setups are the previously mentioned that are in confluence with different things, such as being at support and resistance levels, perhaps after climax or exhaustion reversal bars.
Pin bars work in all time frames, but below the 1hr time frame will need more confirmation and a greater confluence of signals.
But by learning how to use the pin bar reversal method, you can include this powerful setup as one of your essential price action trading methods to help you spot key reversals, along with tops and bottoms. To learn how to trade pin bars using rule based entries, exits, stops and take profit levels, make sure to check out the advanced Price Action Course from 2nd Skies Forex.