Are you tired of trying to be a scalper and continually getting scalped by the market? Perhaps the quick action of the 1-Minute and 5-Minute charts is a bit too much. In fact, trading those lower timeframes can be very difficult, even for the most seasoned professional traders. One of the easiest things many new traders can do to increase their winning percentage and profits is to simply step back and begin trading on higher timeframes such as the Daily, 4 Hour, and 1 Hour Charts. By stepping back and trading off these higher timeframes, new traders will find a much less stressful style of trading as there is no need to sit in front of the computer and watch tick by tick as price moves against you a few pips, and then for you, and then against you yet again.
The transition from trading lower timeframes to higher timeframes can be a bit difficult at first for newer traders. First of all, higher timeframes will require more patience. Price pattern set-ups will not occur as frequently, and when they do, profits may not come as fast. Generally, trading off of higher timeframes may not be as “exciting” as trading tick-by-tick on the lower timeframes. However, common technical analysis tells us that signals off higher timeframes tend to be more reliable than signals off lower timeframes because the higher timeframe signals are produced by a larger set of data. In this article, we are going to discuss one of the highest probability trading strategies in the FX Market-the Pin Bar.
Pin Bar History & Definition
In his book Pring on Price Patterns, Martin Pring discussed a candlestick formation he coined the “Pinnochio Bar.” The Pinnochio Bar, or pin bar, tends to offer very reliable reversal signals when identified and traded properly. Before we go on, here is a picture of a pin bar:
Pring used the original term “Pinnochio Bar” because this candle is like Pinnochio’s nose. Let’s assume the picture above is a 1 Hour Candlestick. As price moved up during the 1 Hour period, it appeared that bulls were in complete control of the market, but then at some point during this 1 Hour period, sellers were able to come in with great fury and not only hold the buyers off from pushing price higher, but they actually came in and took complete control of the trading period. By the end of the 1 Hour session, sellers had completely erased all of the gains that buyers had made, and they were even able to push price below the period open so that the candle closed red, which proves that sellers are now completely in control of the market.
The psychology behind the candle is that price “lied” to us. It tried to convince us it was moving higher, but in reality, price moved much lower by the end of the session; thus, the name “Pinnochio,” or pin bar. These pin bars are a powerful reversal signal when they form in the correct manner and location.
Not All Pin Bars Are Created Equal
The best pin bars will close below the open if the wick is to the upside, or above the open if the wick is to the downside. In the picture above, you can see that the candlestick closed the 1 Hour trading session below the open; thus, it closed as a red candle. That is what you want to see. If there has been a nice move up in price and the pin bar forms at the top of the move with a big wick to the upside, you want the candle to close red, as in the picture above. However, if price has made a nice downmove and a pin bar forms at the low of the move, with a big wick to the downside, then the body should close green.
If a pin bar does not quite do this, it can still be okay, but be assured that the very best ones will close in the manner just described. And always remember, trading only the best pin bars will offer you the highest probability of trading success.
The body of a pin bar must be no more than 20% of the measurement of the body to the tip of the wick. Therefore, if the body is 8 pips and body to end of wick is 25 pips, the candlestick would not be classified as a perfect pin bar. If the wick to body is 100 pips, then the body should be no more than 20% of 100 pips, or 20 pips. If it is a few pips more, it can be okay, but is should be very close to 20 pips or less.
The nose should not be very long at all. If the nose is to long, the candlestick will form what is called a doji, which is a candlestick with a small body and equal length wicks on each side. A perfect pin bar will have a very long wick on 1 side and a very small wick, or even no wick, on the other side.
Location is of extreme importance. Pin bars should not be traded in the middle of consolidation or a sideways market. Oftentimes in consolidation, pin bars will form, but these signals are much less reliable. Ideally, there should be no candles to the immediate left of a pin bar wick. Instead, there should only be open space. Let’s examine a few pictures.
DON’T TAKE THESE!!!!!!
The above pic is an example of a perfect pin bar forming in the middle of consolidation. Even if the pin bar’s form is perfect, as the one in the above pic is, it has to form in the proper location!! This one does not, so you should not trade it. You must find pin bars that form at the top and bottom of moves.
In the above picture, you can see that the pin bar forms at the bottom of an extended move. This is where you want a pin bar to form.
The next important aspect of the pin bar is making sure it forms at a key area of support/resistance. You don’t want to trade them in random price locations. They should be forming on key areas of support/resistance as identified through common technical analysis. They should be confirming a price reversal.
Entry and Exit
Entry on is always on the break of the nose by 2-3 pips and the stop loss is always placed 2-3 pips beyond the tip of the wick.
Pin Bars are not a magical formula that will produce endless pips with no effort. They are simply a price pattern that when traded properly can combine with other forms of technical analysis to provide very high probable set-ups in the FX Market.