How to trade pin bars in forex

  • How to trade pin bars in forex

    In forex trading, analyzing with price action is very common, this strategy is very popular among manual traders. One of the well-known forms of candlesticks for reversal pattern analysis is the Pin Bar.

    The appearance of this pattern is believed by many traders to be a signal that the next price forecast will move.

    Many traders believe that this strategy is one that can be relied on, and is widely taught in forex education.

    But what is a Pin Bar and how does it work, and also how to trade with a Pin Bar? Find the answer in this article.

    What is Pin Bar Forex?

    Basically, a Pin Bar is a candlestick that reflects price rejection from a certain level.

    The shape of the Pin Bar is identical to the small body and long shadow on one of the tails.

    The direction of the shadow tail is what indicates rejection so that prices usually traders will think that there will be a reversal in price direction.

    Pin Bars can appear on an uptrend which is commonly called the Bearish Pin Bar. The appearance of a Pin Bar during an uptrend signals a reversal from an uptrend to a downtrend.

    The Bearish Pin Bar has a small body shape where the open price is almost the same as the close price with an upper shadow that is at least twice the size of the body.

    Meanwhile, the lower shadow is very small or even absent. The Bearish Pin Bar signal will be even more valid when the tip of the upper shadow comes into contact with the tested resistance area.

    On the other hand, the Bullish Pin Bar is a pattern that indicates a reversal from a downtrend to an uptrend.

    The Bullish Pin Bar has a small body and a lower shadow that is at least twice the length of the body. The open price is almost the same as the close price, and the upper shadow appears very small or in some cases completely absent.

    If the lower shadow of this candle appears close to the tested support area, the reversal signal will be even more valid.

    Broadly speaking, the Pin Bar is divided into two, namely the Bullish Pin Bar and Bearish Pin Bar, but in its form, it can be divided into  several types like as the image below;


    Pin Bar itself actually stands for Pinocchio Bar, which was popularized by Martin Spring in his book Technical analysis explained.

    The characteristics of Pin Bar candlesticks

    The shape of the Pin Bar can resemble a hammer or inverted hammer, but in general, it has the following characteristics:

    • The pin bar has a tail that is longer than its body. Some call it a wick or shadow.

    • The length of the tail indicates the strength of resistance at a certain price.

    • The longer the tail, the more valid the pin bar is. This indicates a higher rejection sentiment towards a certain price.

    • The smaller the real body of a pin bar, the more valid the pin bar will be.

    In general, it can be concluded that a pin bar is considered valid if the length of the tail is approximately two-thirds of the total length of the pin bar. The other side of the tail is called the nose. The shorter the nose, the more valid the pin bar will be.

    Pin bar candlestick pattern

    As previously mentioned that there are two Pin Bar candlestick patterns named Bullish Pin Bar and Bearish Pin Bar.

    Bullish Pin Bar Pattern

    Bullish Pin Bars often occur during a downtrend. Usually the appearance of this Bullish Pin Bar indicates a possible reversal towards an uptrend. This is indicated by the rejection that occurs in accordance with the tail pin bar.

    However, sometimes it happens after this Pin Bar appears but it turns out that it is only a temporary panic, and the price moves back downwards.

    For this, what needs to be considered is the next candlestick as confirmation, if it is closed to form a bullish candle, there is a high possibility of a reversal.



    Bearish Pin Bar Pattern

    The opposite of the Bullish Pin Bar, the Bearish Pin Bar pattern often occurs in an uptrend market, although it may occur in a downtrend market.

    When this pattern appears when the price is an uptrend, it gives an indication that there will be a trend reversal to a downtrend.

    However, this pattern can give false signals, so traders must pay attention to risk management for false signal protection.

    The tail of the bullish reversal pin bar pattern is below the real body, this indicates a rejection to break the lower price level.

    While the tail on the bearish reversal pin bar pattern is above the real body, this indicates a rejection to break through a higher price level.

    The pin bar is formed by the bar between the bars before and after, so confirm the validity of the pin bar on the bar after the pin bar is formed. Simply put, by looking at the candlestick after the Pin Bar.

    How to Confirm the Pin Bar Reversal Signal

    Pin Bar signals can be used in trend or sideways markets. However, to minimize trading signals with less profitable profit opportunities, you should only use the Pin Bar as a reversal signal to capture opportunities for trend reversals.

    The key to using a Pin Bar as a reversal signal is to sort out which Pin Bar is of good quality and which is not. This is because the Pin Bar is a candle pattern that appears very often on the chart, so the signal probability tends to weaks. How to confirm Pin Bar with following step

    First  Step

    Make sure that the Pin Bar that appears only has the long shadow of one candlestick that is at least twice the length of the real body. Do not take signals from Pin Bars whose shadow lengths are relatively the same on both sides, because the pattern indicates very strong uncertainty; between buyers and sellers have equal strength. Make sure the Pin Bar position is against the price trend that is being formed.

    Second step

    Pay attention to whether the Pin Bar is formed in the key Support Resistance area. If the Pin Bar pattern appears in the support and resistance areas, and the area is increasingly being tested, the more valid the area will be used as a reference for price reversal.

    Third step

    Pay attention to how the strength of the trend is formed. If the trend is not overbought or oversold yet, this is not the momentum to create a reversal. You can use the oscillator indicator to measure the overbought and oversold areas through overbought and oversold levels. Or with the ADX indicator which is applied specifically to measure trend strength.

    If you are an expert with Price Action analysis methods that can identify trend strength without indicators, you can apply it.

    How to trade with a Pin Bar pattern

    Pin Bar patterns can appear at any time, even during an uptrend or downtrend. So you have to wait for this pattern to appear.

    How to trade with the Pin Bar is relatively easy, although only with candlestick pattern price action, it can be used as a reference by going long or short above or below the short wick while waiting for the candlestick confirmation afterwards. Place the stop loss usually a few pips above or below the long wick.

    Take a look image below as example

    The picture above is the AUDUSD pair, where the Pin Bar appears after a downtrend, and is confirmed by the following candlestick which forms a bullish candlestick, so that's where traders take action to buy with a stop loss below the long wick.

    The percentage of pin bar formations that appears shows a trend reversal pattern, but there are also pin bars that show trend continuity.

    There are 3 ways to determine the entry point on the Pin Bar after the pin bar is formed, namely:



    • Market entry:Market entry is instant real time execution, you click the buy or sell order at the current price, the Bullish Pin bar is open buy and the Bearish Pin bar is open sell.

    • Stop entry: This is a type of pending order requiring the order to be opened at a specific price above or below the current price. In other words, it is to place pending Buy stop and Sell stop orders at a specific price. If the price moves up and reaches the ask price, the buy stop will be active. Conversely, if the price drops to reach the ask price, a sell stop order will be opened.The stop loss level can be determined by a few pips below the lowest long tail pin bar on the buy stop, or a few pips above the long tail pin bar on the sell stop.

    • Limit entry: This includes a pending order but the opposite of a Stop order, if the stop order buys a price above the current price, the buy limit order is at a price below the current price. Likewise, the Sell limit is asking for a price above the current price. Place a Stop loss a few pips below the long wick on the buy limit or a few pips above the long wick pin bar on the sell limit. The advantage of limit entry is that traders can determine the best price based on analysis, but the disadvantage is that if the price is not touched by the market, the limit order is inactive.



    Profit target

    Then how to determine the profit target rules on the Pin Bar trading strategy? In fact you can set nested targets. Here you open several positions at the same price by adjusting the position size and your risk management.

    You can add Fibonacci extensions to find targets based on the golden ratio Fibonacci.

    However, for safer trading, open one position with a small position size so that it is low risk, and find exit points based on resistance support and price action.

    You need to pay attention when the price has bounced, whether it can break the support or resistance or just rejection.

    If there is a breakout it is better to close your position immediately. Take a look image below


    The image above is an example of a tradingview pin bar indicator on WTI crude oil, when you find a valid Pin bar marked by a candlestick confirmation afterwards, for the target it is better to take the daily Average True Range, with the note that if the price bounces and breaks the support line then the order is closed properly with profit or loss.

    The reason is that the possibility of a breakout is a trend reversal.

    To get a high probability of entry, it is recommended to enter after the pin bar only if there are sufficiently strong supporting factors such as support or resistance, Fibonacci retracement levels or expansions especially 38.2%, 50% or 61.8%. Or the area is overbought and oversold.

    Conclusion

    Trading with the Pin bar pattern is very simple to use, however finding a valid Pin bar requires experience and a good understanding of price action.

    Not always every pin bar appears will be a profit for the trader, it may even be a false signal. So it is recommended that every time you make a new entry position it is still necessary to use a stop loss for excessive risk protection.