The pin bar, also known as long tailed bar, is one of the most common setups you would find when browsing your charts. There are tonnes of pages written about how to trade a pin bar. By you now you may have an idea, however, wait don’t rush. In this article I’m going to explain how I trade a pin bar; when to enter a trade, when to exit, where to fix your Take Profit and Stop Loss. Equally important, you must know which are the pin bars to trade at and which are those to better skip. Not all pin bars work well, unfortunately, and here you will learn to minimise your risk. Learn taking those with higher risk-reward ratio and discard those with very little or no odds for a winner trade.
What is a Long Tailed Bar?
We define as pin bar the formation of a simple candlestick with a long tail and a small head, indistinctly, the long tail and head can be above or below of the candlestick. You may hear about pin bar elsewhere with different names such as hammer, inverted hammer, bullish long-tailed bar, bearish long-tailed bar and some others.
Here you can see represented both types described above for Pin Bar. Both are equally common and both are equally tradable. Just remember; one is bearish whilst the other is bullish. Let’s don´t mess it up, continue reading below.
Idea💡 “I believe you are here because you have an idea about trading charts and japanese candlesticks. If all you have read so far sounds foreign to you, I would recommend you to check out my simple guide to understanding japanese candlesticks like a pro“
Meaning of a Pin Bar
A part from a definition and format, importantly alike, is to know the meaning of a long tailed bar in the context of trading and how it is shown in a chart. These bars represent a saturation in price and, most likely, a price reversal of the instrument we are trading. Say for example our bearish pin bar in the picture above (red); its long tail represents no other that the price reached a high and, right after, sellers joined the game to make the price go back to the level of the beginning of the candle. On the contrary side, on the bullish candle (green), its price reached a low from which, buyers joined and took control just to make the price to go back where it was when the candle started.
In both cases we are in front of a exhaustion or saturation of price. Either at the high or the low. Traders have found the opportunity to take their share by entering in the right direction.
Location of a pin bar
Before getting excited and get your charts to find pin bars, please take into account that: 1) The ideal location of of a bullish pin bar or hammer is at a support and 2) the ideal location of a bearish pin bar or inverted hammer is at resistance.
Half way through, in the middle of a bullish or bearish trend, you may find several pin bars which, most of the times mean nothing more than a simple continuation but they appear somehow randomly.
In order for us to be able to trade a pin bar, it is compulsory to find the pin bar at a key level such as a support or resistance. These are the pin bars with higher chances to work in our favour. Definitely not all of them will work but, chances are there for us.
Ideal Timeframe to trade pin bars
As per our Price Action PROfessional course, we don’t trade on charts lower than 4H and likewise, with a pin bar, there’s no difference. We will trade pin bars only in 4H, D1, W1 and M1 charts, where the results are more likely to appear. Does it mean we can’t trade pin bars on 1H or even 15M? no, definitely. You are free to find pin bars on 1 hours chart and even on 15 minutes. However note, these are less likely to give you any positive results:
- because supports and resistances are not well defined with low timeframes.
- a pin bar can be formed in a low time frame due to noise of the specific moment. e.g. release of economic data.
- because price action traders don’t check charts below 4H. Ok… I admit we sometimes we do check but what is a NO-GO, is to trade on below-4H charts set-ups).
- Price Action, by its nature encourage traders to swing trade with higher returns in longer trades. Rather than several trades within the date (intra-day) for grabbing just a few pips each time.
Trading pin bars
Let’s analyse firstly how to trade a bearish pin bar. This is the bar with a long tail on top and a small red body at the bottom, the smaller the better. In the picture below you can see both, bullish and bearish. Bullish, of course, works exactly the same way as bearish but we will fix all points; enter, exist, TP and SL, right at the opposite side.
Taking into account what you just read above; A pin bar means that the price reached a high maximum point from which, buyers (you and me) decided not to continue buying, they did the opposite instead: to sell. The chances for sales to continue beyond the based of the candle are potentially high. Whilst the chances for buys to get back in control of the market exist though, but less likely to happen.
So no, can we activate our sell just below upon full formation of the candle? Yes, of course we can but it is not advisable to act in desperation. Forex trading, among others, consists keeping calm and identifying the entries that will give higher returns with the minimum risk. If we enter (sell) right below the candle, we risk that buyers take control back of the market and, with it, we are increasing our loss if these end up existing. We try to avoid this situation as much as possible.
The entry (ideal) for trading pin bars
I advise you to wait patiently before activating our sell until, roughly, half of the pin bar. This way we guarantee, in case the set up doesn’t work this time, our loss is reduced to half and so, our profit will be in the same way increased.
Fixing SL (Stop Loss) when trading pin bars
By now you maybe guessing the point to fix our Stop Loss (SL). This will be right above the pin bar, do you agree?. There are traders out there whom fix it right at the highest price. My advice though, is to fix it a few pips above just to take into account the spread, which can be very tricky at times and make out trade close with loss. If you can afford it, fix your SL 10, 20 or even 30 pips above the highest point of the pin bar, just to avoid this situation to happen.
If you can’t afford to fix your SL slightly higher than the highest point of the pin bar, most probably means; 1) that you can’t afford the trade neither or 2) that you entered too soon at the bottom. Whichever it is please think, analyse and do your numbers before your entries. Consider always the worst-case-scenario likely to happen, just to play safe.
Fixing TP (Take Profit) when trading pin bars
As a general rule or norm, Take Profit (TP) when trading a pin bar, will be fixed at a distance, below the bottom of the bar itself, equivalent to the whole pin bar. This is the simplest theory to take profits. However, I would recommend not to rush and take into account the context of your trade, let me explain:
Bearish pin bars happen oftentimes right at the resistance. Many times they mean a change if the trend from the top. By closing a trade just a little below when its potential to reach a major support, we are losing high potential profits right in front of our eyes. This is not just a crazy idea think it over: and a daily chart, a nice bearish signal on the resistance… where is the next hypothetical level? You are right!, the support.
Idea💡 “If you are stating in this wonderful world of trading or you still don’t master any technique, I encourage you to trade following just one technique or strategie at a time. How about pin bars? Just master it by trading exclusively. Go for a second strategy when you are a pin bar expert. In my articles you will find multiple trading strategies“
Conclusion: Trade pin bars!
Pin bars appear often in our charts. I’m not talking about 5M, 15M, 30M….. No! ours are D1 and, the lowest I would accept, 4H. You can go check your favourite pairs for the past 2, 3 weeks, 1, 2 or 3 months. You will know by yourself how many opportunities there were.
Even if you are unable to find them more than once or twice per month, the opportunities they generate are worth to try. Wouldn’t you like to master a strategy that allows you working a couple of times per month with positive results? You wait no more and start trading pin bars.
I sincerely hope you have enjoyed this article and you found it useful.
Remember if you have any questions, need clarifications or you would like simply to say hi to me, get in touch here.
Trading tips and Forex articles for you
Read More
Read More