Using Pin Bar Reversal Trading Strategies
How to make pin bar reversal trading work for you. Discover the best methods by reading Queensway’s in-depth article.
Pins & Bars
The pin bar is a candlestick reversal pattern that indicates that the price action at a particular point has been rejected by the market. It is a familiar candle formation on Forex charts and is one of the candlestick patterns that are formed by just one candle.
Pin bar reversal trading strategies are particularly successful when the formation of the pin bar is near perfect and it breaks through a key resistance or support price before being rejected.
A trader who is totally familiar with the formation of a pin bar will find that pin bar strategies, if traded correctly during favourable market conditions, can yield substantial profits.
Recognising Pin Bars
The characteristics of a pin bar are easily recognisable in pin bar trading. It is a candle with a very long wick/tail and a small body; the wick/tail generally should be two thirds or more of the total length of the candle.
Just like any other candle on a candlestick chart, if the colour of the body is white or green, the closing price is higher than the opening price, and if the candle is black or red, the closing price is lower than the opening price. (See below)
The opening and closing price must be close together. Preferably, the opening and closing should be the same price or as near to the same price as possible. Also, the opening and closing should be at one end of the bar or as near to the end of the bar as possible.
In a not so perfect pin bar, there could be a small nose protruding below (bearish pin bar) or above (bullish pin bar) the body.
The set-up of a bullish pin bar looks like the pin bar on the left as it reflects the markets’ rebuff of a lower price and/or support level. This kind of set up very often leads to a rise in the price of the currency.
The set-up of the bearish reversal pin bar is the opposite of the bullish reversal and looks like the pin bar on the right. The bearish set-up indicates the strong possibility of prices retreating and falling.
The diagram of the GBP/USD 1-day candlestick chart below shows a perfect bullish reversal set-up for a reversal from a downtrend to an uptrend.
Similarly, a bearish pin bar reversal set-up can be seen clearly on the GBP/USD 1-day candlestick chart below.
The pin bar indicates a reversal as the market rejects the higher prices, the price of GBP/USD falls and a downtrend begins.
How to Make The Most Out of Pin Bar Reversal Trading
To use a pin bar trading strategy, you need to study the candlestick chart of the currency you are interested in and the time frame you feel comfortable in trading.
Pin bar trading strategies only really work in the longer time frames such as 1 hour, 4 hours and 1 day. They do not work in smaller time frames.
Once you have identified the perfect set-up for a pin bar reversal, you need to decide when you are going to enter the market and where your stop order is to be placed.
When the pin bar has formed, a market order should be placed 10 pips above the closing price for a bullish pin bar, or 10 pips below the closing price for a bearish pin bar.
The stop should be placed at the price at the end of the pin bar tail for both a bullish or bearish pin bar.
The USD/CAD candlestick chart below illustrates a good bullish pin bar reversal set-up.
Your entry order would be placed at 1.0180 which is 10 pips above the pin bar’s closing price of 1.0170.
The stop order would be placed at 1.0136 which is the price at the bottom of the tail.
Notice the following candle is bearish, but because the stop is placed at the end of the tail, the stop is not triggered.
In addition, the tail of the pin bar has broken through the key support level of 1.0150 and been rejected, which gives more credence to the pin bar set up.
The USD/CAD price has then risen to 1.0452, giving you a nice profit of 434 pips to date in terms of pin bar trading.
Pin bar strategies are important technical analysis tools for traders and should be included in your set of trading tools.
Common Mistakes Made by Pin Bar Traders
Pin bar trading is considered to be one of the most reliable methods when trying to determine the price action of the particular market you’re trading in. It is sufficiently reliable and is without a doubt, a powerful tool in any trader’s arsenal. They are extremely easy to identify and only require that you pay attention to a two-candlestick formation.
With that said, although pin bar trading can seem simple, it will only afford the trader a high probability once they have learnt how to properly trade using the method. This will take time to perfect so don’t become disheartened should you fail to do so when first starting to use this method of trading.
Often, traders will begin trading on what they think are pin bars when in actual fact, they do not meet the minimum criteria. This is why some traders do not reap the rewards they intended to. In order to identify a true pin bar, the price must open and close within the previous candle.
Yet another common mistake many make is using the incorrect areas of the chart or by using the wrong prices. Some traders seem to think that they can use the pin bar reversal strategy as a continuation signal, which causes frustration.
In short, be sure to do your research and fully understand how and when to use bearish or bullish pinbars for trading before betting your house on them.