In today’s episode, we will be discussing pin bar candlestick formations, their properties, and how they can aid our trade decisions.
We have previously discussed how price action traders, can potentially use the price chart alone, without the need of any other indicators to make trading decisions. There are many potential setups, that traders utilise in order to increase the probability of a successful trade.
One of the more desired conditions that traders can look for are the short-term reversals in price. Higher probability candlesticks can help us for-see these potential reversals, one of which is the Pin Bar candlestick formation.
A pin bar pattern consists of one single candlestick price bar. It represents a sharp reversal and rejection of price. The pin bar reversal, as it is sometimes referred to, is defined by its long tail or wick. Pin bars generally have small real bodies in comparison to their long tails, which makes them easy to identify.
The tail of the pin bar shows the area of the price that was rejected, The way we would read this is, the price will now continue to move in the opposite direction that the tail is pointing.
A bearish pin bar signal is one that has a long upper tail and is rejecting higher prices with the implication that price will fall imminently. A bullish pin bar is the opposite and has a long lower tail. This shows rejection of lower prices with the implication that price will rise in the near-term.
Traders can potentially look to go long or short, looking to capitalise on the strength that has driven price off the values that the pin bar has presented.
It is very important to remember that not all Pin Bars can be identified as certainties for one very good reason. Trading Pin Bars is counter price action, it is to a degree anticipation change in the trend, and something we have stated is something we should not do. This is why trading reversals is somewhat advanced, as you will need to be sure of what you are doing and relying on external factors to help you make these judgements.
Next, we will look at a Pin Bar Trading Strategy. Pin bar trading strategies will usually begin with opening a trade after a candle is closed beyond the smaller wick of the candle. This would put our entry around here, and the stop loss will be allocated just beyond the longer wick of the candle.
On this chart, we see a bullish pin bar candle. The lower candle wick goes below the general price action. This tells us that the pin bar is authentic and a high probability candlestick.
The next candlestick which comes after the pin bar closes above the upper wick of the pattern. This is the signal to open a long trade based on our pin bar trading strategy.
We must take note of any support or resistance levels that could stand in the way of our trade progressing in the direction we want. When the price is approaching these points, we need to observe closely due to the possibility of rejection.
We can see here that price moved through a resistance level after our entry, retraced to it and then continued on to go into further profit which is what we had anticipated. We would like our take profit level to be at least twice the distance of the stop loss level, but in this instance, we are going to observe price action to determine when we should get out of our trade.
We continue to ride out the trade until we spot this bearish candlestick formation indicating a potential reversal, based upon this information we will now close our trade. At times we will make more than we anticipated using this method and other times we will make less. This price action strategy can be very time-consuming as we need to be actively watching the charts or checking in regularly to assess our exit.
In this next example, we show how it is important to know the difference in behaviour of a false pin bar signal. A false pin bar is apparent because the long wick does not stick out from the recent price action. As we see here despite a pin bar forming its wick doesn’t go beyond the recent price action, and instead of a reversal, we witness a continuation. Other pin bars which should also be avoided are ones that occur during tight range-bound conditions. Sometimes you will see many occur in triangle formations.
In conclusion, The pin bar candlestick pattern is one of the most high probability and recognisable candle formation known.
The pin bars characteristics are, it has a small body, a long candle shadow or wick, which is at least twice the size of the entire candle, and a small wick on the opposite side of the candle.
The Hammer and the Shooting Star are types of pin bar candle patterns.
In order for a pin bar to be valid, the wick must go above or below the price action. The highest probability pin bars are reversal signals that generally come after a prolonged price move.
Always be aware of the circumstances surrounding false pin bars and tight ranges with pin bars presenting themselves.
I hope you have enjoyed our educational session today ladies and gentlemen, please take some time to analyse your charts for the study of pin bar reversals formations and contemplate what you have learned here today, remember contemplation is the key to learning.