Pin bars can form potent trade setups. Pin bars represent sharp price rejection which any price action trader must take advantage of if it happens on a key chart level.
When they form in a support or resistance zone, you must watch for trade setups that will precede them and enter the market appropriately.
The long tail which a pin bar reversal candlestick forms is known as a wick or shadow.
The area that forms the open and close of the pin bar is generally small. This area is known as the real body. They are often thinner while the shadow or wick is longer.
The shadow of a pin bar typically forms where price has been sharply rejected. When price acts in this manner, it means that it will reverse and move to the opposite direction to where the shadow or wick of the pin bar is pointing.
When you spot a bearish pin bar for example, which normally forms in an area considered a resistance zone, it implies that price is considering to reverse to the opposite direction, and that the bears will soon take over the market.
On the other hand, a bullish pin bar, which typically forms in an area considered a support zone will indicate that the bears are about to be overwhelmed, and that price will instead reverse in the opposite direction.
Price Action Trading Strategy: Trading Pin Bars
There are a few ways price action traders can enter trades based on pin bars. The first one is entering the market at current price.
For you to enter the market in this manner, you must wait until the pin bar is formed. After all, this is not a pin bar until it is closed with a long tail and a small body on either side.
The second most common way of trading a pin bar signal is to wait for price to retrace to about 50% of the entire length before entering based on your limit or stop entries.
The last option is to enter the market by way of ”on stop” entries. In this manner, you would be setting ”on stop” entry below the low of a pin bar or just above the high of a pin bar.
To get a clear hint of what I am talking about here, consider the screenshot below from Priceaction.com.
How to trade pin bar signals when the market is trending
I like trading the trend because trends offer excellent risk to reward ratios. You should definitely be looking for these pin bar entry signals on a trend for that very reason.
Let us consider the example below. This is clearly an uptrend. Their was a bullish pin bar which suggested that the bulls were going to drive price further up the trend.
The bullish pin bar suggests that there was sharp rejection of price as reflected by the long tail of that pin bar.
Using Pin bars to trade against the trend with reference to key chart levels
You shouldn’t like trading against the trend. But If you have to, then you should be trading pin bars in relation to key chart levels where support or resistance zones had been formed earlier.
As you can see in the chart below, a nice bearish pin bar/pin bar reversal formed at a resistance zone. The long tail pointing upwards is an indication that price was sharply rejected in this area, thus you should be looking for an entry point once the reversal pin bar has completed its formation.
Things to watch out for when trading with pin bars
(a) As a beginner, don’t trade against the trend with a pin bar. It’s a lot easier to trade pin bars while following the direction of the trend.
(b) Generally, pin bars mark a short or long term impending reversal in the market. Watch out for them and you may just catch a very big move in the market.
(c) Don’t trade every other pin bar you see on a chart. Not every pin bar is worth trading. The best ones usually form on a trending market.
You are better off trading pin bars if you spot them after a retracement occurs in a trend or after support and resistance areas have formed.
(d) The 4 hour and 24 hour time frames are usually the most reliable to pick trade setups from. These are your bread and butter when you spot a pin bar signal from.
(e) Long tailed pin bars present very high probability trade setups compared to short tail ones. You don’t have to trade a short tail pin bar especially if you’re not sure about it. A good one is quite obvious when you spot it.
Rule of the thumb: if you find yourself re-thinking a pin bar signal, just skip that trade and fold your hands until a sure trade setup forms.
And finally, a price action trader must learn how to spot these pin bar trade setups. You should practice them on a demo account first before opening a live account with a broker like myfxchoice. When you become proficient in these price action trade setups involving pin bars, you will have a high chance of becoming a successful trader.
For those of you who are fearful about trading, here’s a post on how to make money with Forex without trading. Finally, if you don’t want to undergo the hustle of learning what I have discussed here, here’s a link to automated trading systems which you can buy.