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How To Profit in the FX Market By Trading Pin Bars
One of the most powerful candlestick formations that occurs in the FX Market is a formation called the Pinnochio Bar. The Pinnochio Bar, or Pin Bar for short, was first coined by a man named Martin Pring. Pring has written several classics on technical analysis, including his most popular work, Pring on Price Action. In this article, we will examine the basic formation of the Pin Bar and how to play it in the FX Market.
First of all, the most important thing to realize when trading candlestick formations in any financial market is that a trader cannot trade candlestick patterns as a system. Let me explain. A doji is a very common candlestick recognized by many traders. If a trader enters a trade everytime he sees a doji, he will lose money over the long term. Candlestick formations cannot be traded in isolation. They are only a part of the overall puzzle. They are indicators of possible future price action. However, for ultimate effectiveness and success, they must be combined with other factors that also confirm a trade entry.
Pin Bars are no different. Once we identify the physical semblance of the this candlestick, you will begin to see them rather frequently. However, they are not all created equal. If a trader were to enter a trade every time a pin bar formed, they would definitely lose money over the long term. However, if you identify an area on your chart as a key zone of support and resistance, and then a pin bar forms at that level, your probability of a winning trade dramatically increases.
As you can see in the image above, a pin bar is a candlestick bar with a very long wick in one direction with a very small body. The wick needs to be at least 3-5 times the length of the body in order for the pin bar to be a true signal. Furthermore, the best pin bars are those that close in the opposite direction of the wick. For example in this picture, if the candle had closed green, with the close above the open, it would not be as powerful of a signal. Let’s break down the psychology of the pin bar.
The psychology of the pin bar relates to the battle going on between buyers and sellers. Every pin bar is telling the same story. When the candlestick opened, buyer or sellers were able to push price in a very impulsive move for many pips. Eventually a high was hit, and the opposite camp retaliated with great fury. In the case of the above image, the opposite camp are the sellers. The sellers were eventually able to hold price at the top, and not only were the able to hold the top, but they proceeded to rush price all the way back down and erase all gains the buyers had posted. Then, as an exclamation point, in the candlestick above, the sellers were actually able to push price back down below the open, further emphasizing the point that sellers are now in control.
This story that every pin bar tells, is a strong indicator that price will continue to move in the same direction during the next few candles. The timeframe where these candlesticks are most effective are the higher timeframes—the 4 Hour, Daily, and Weekly. When these candlesticks form at areas of support and resistance as measured by horizontal lines, trendlines, Fibonacci, etc, these candlesticks are extremely accurate. The key is to play them on the higher timeframes, and only trade them when they occur at key levels of support and resistance. Here is an example that occurred on July 8th on the GBP/USD on the 4 Hour Chart.
This pin bar happened to form on an extremely important level on the Pound which was at 1.5225. When price spiked up to the 225 level and then backed off sharply, forming this pin bar with the close of the candle below the open, this was an excellent indicator price was going to continue moving lower, which it did.
Entry and Exit
When you find a pin bar forming on a key level of support and resistance, you want to enter the trade on the break of the tip of the low if you are going short, or on the break of the tip of the high if you are going long. Your stop should always be above or below the opposite side of the candle. So in the above picture of the Pound, your stop loss would be up at 1.5240. These candlesticks don’t show up everyday on the higher timeframes at key levels, but when they do they are extremely accurate. This is one more methodology that can be added to your strategy to help you increase your probability of profiting with fx trading.