I want to use this trading lesson to go into more detail about the price action pin bar setup that I teach in my free forex trading course.
I hope that by the time you have read this lesson you will understand precisely how to identify pin bars, how to trade them and how to avoid being sucked into trading bad setups as well.
What Is A Price Action Pin Bar?
The price action pin bar is a trading pattern that you can observe on your forex candlestick charts. It is characterized by the fact that the body of the candle is tiny and there is a long protruding wick or ‘tail.’ They are straightforward patterns to spot on your charts because their appearance is so distinctive they should literally ‘jump out’ at you when you pull up your charts to analyze the market. A pin bar is a significant price action trading signal because it tells us a lot about how the market is currently behaving – which is a fundamental prerequisite to determining what the market is going to do next!
Take a look at the chart below, and you will see I have highlighted all of the pin bars that have recently occurred. Do you notice how obvious they are to spot on my forex chart? Can you see how you might be able to use these pin bars to trade profitably in the market? Keep reading, and you will find the answers to all of these questions and more!
What Does A Pin Bar Tell Us About The Market?
As I’ve already said, pin bars are strong signals because they tell us a lot about the current market sentiment. A pin bar essentially shows us that the market has tried to move lower (or higher) but failed to do so and rejected lower prices.
The best kind of pin bar is one that closes at the same price at which it opened and has a relatively long tail. This shows us that although prices did move very far in a given direction, they failed to hold at the new levels and quickly ran back to where they opened.
When prices are ‘rejected’ in the forex market, it is a very significant sign that the market is going to move in the opposite direction. For example, if we see a ‘bullish’ pin bar on our forex charts, we know the market has just rejected lower prices. When the market rejects lower prices, it is suggesting to us that it is going to move higher. Although the market managed to push lower, it failed to hold the new low prices because lots of new buyers entered the market once again.
I hope you’re beginning to see that this information can be handy in determining which direction to place your trades and the price action pin bar is a very valuable tool in helping you reach this vital decision.
How Should I Trade A The Pin Bar Setup?
There are a few different ways to trade pin bars in the forex market, and it depends entirely on the market conditions at the time for your given currency pair. I am going to discuss some common scenarios in which you will want to take advantage of a pin bar setup and teach you the different ways to trade them in the rest of this article.
Suffice to say, it is not always easy to decide how to trade a pin bar, and success is only genuinely achievable if you understand how to trade them under different market conditions.
For example, if you try to trade a pin bar in a trending market like you would in a range-bound market you will probably find a lot of your trades go on without you, and you’re left wondering why your pending order was never filled. Keep reading this article to learn how to trade pin bars under different market conditions.
Trend Trading The Price Action Pin Bar
Trend trading pin bars is generally the most profitable way to trade them in my opinion. When a market is trending it is moving in a given direction with a lot of strength. When there is strength in the market, it’s easy to take advantage of the way it’s moving and maximize your profit.
When a market is trending, there are two ways you can trade pin bars.
You can either look for price action pin bars that form from horizontal support/resistance, or you can trade pin bars from dynamic support/resistance. Either way, you should wait for the pin bar to form from a logical area in the market and always trade inline with the primary trend.
I’m going to show you some examples of pin bars that have formed recently in trending markets to give you an idea of how you could trade them and show you that they are great setups to take advantage of when trading the forex market.
Range Trading Pin Bars
Trading pin bars under range-bound market conditions is very different to trading them inline with a clear daily trend.
When the market is chopping back and forth between two horizontal support and resistance levels, you need to trade pin bars in a very different way and have very different expectations. When the market is range-bound it’s often much harder to obtain anything above 1:2 risk/reward when trading a pin bar – indeed if the range is very narrow, you might find it difficult even to get 1:2.
In this scenario, you should simply avoid taking the pin bar because it is not worth risking your money if the reward does not amount to at least two times the capital you put at risk.
This is a stark contrast to trend-trading pin bars, where it’s often possible to take advantage of the strong market conditions and bag a 1:3 or even 1:4 risk/reward trade. When I trade pin bars in range-bound market conditions, I often enter the pin bar after a small retracement. This gives me a really good chance to get a better risk/reward ratio, and you will also find that when a pin bar is presented in ranging conditions, you see a small retracement before the market moves in your desired direction, making it possible to obtain a much more favorable entry and a tighter stop-loss.
I have included some charts below showing you examples of recent price action pin bars that occurred in raging conditions and provided an explanation of how they should be traded.
Counter-Trend Price Action Pin Bars
There are very few situations in which you should think about trading counter-trend pin bars in the forex market. Trading counter-trend is inherently riskier, and if you’re a beginner trader, I would even go so far as to say you should never trade a counter-trend pin bar at all. I appreciate you don’t want to be a beginner forever, and indeed, some of my readers may not be beginners at present, so I’m going to use this part of today’s trading lesson to teach you about how to trade counter-trend pin bars.
There are a couple of tricks you can use to trade counter-trend pin bars that I’ve learned over the years, and I think you might find them helpful too.
1. Wait for a double top or double bottom to form before placing a counter-trend trade.
A double top (or bottom) is a common reversal pattern that many traders use in the forex market. It can be identified when price visits the same horizontal level on your chart twice before changing direction. The chart below shows an example of a very obvious double bottom that formed recently.
If you see a counter-trend pin bar and are thinking about whether to trade it, I would first recommend you check whether it appears to be forming as part of a double top or double bottom, if it doesn’t then you should think twice about whether to trade it or not. If there is no double top/bottom it doesn’t mean you should let the pin bar go necessarily, if the next condition applies then there may still be some merit in trying to take the counter-trend trade.
2. Check for VERY significant support/resistance on the daily/weekly timeframe.
This can sometimes mean there is merit in trading a counter-trend pin bar. If the pin bar has formed at very, very significant support or resistance level, then there is a higher probability of the trade succeeding. The chart below shows a bearish counter-trend pin bar that formed at significant weekly resistance, and as you can see, it worked out very nicely for anybody that decided to short it.
Once you’ve identified a counter-trend pin bar that you think is worth placing a trade on you, need to reduce the risk of failure by the type of order you put. If you enter at the market or place a limit order you significantly increase the chance of failure when trading counter-trend. I have learned over the years that it can be profitable to trade counter-trend if you always use buy-stop or sell-stop orders. This allows you to trade with momentum behind you.
For example, let’s say you have identified a bearish pin bar in a bullish market at key weekly resistance. If you place a sell-stop order below the low of the pin bar, you protect yourself against a continuation of the uptrend. If the uptrend continues, it should move on without filling your order, and your capital will be protected. Whereas, if you entered at market and the uptrend continued invalidating the counter-trend signal you would have been stopped out and lost money – not ideal at all! Below you can see how you could trade a counter-trend pin bar using a sell-stop order to reduce the risk of taking the trade.
Wait For The Candle To Close!
I want to make one final point before wrapping up this trading lesson – this is perhaps the most crucial point you should take away from this lesson if you don’t remember anything else. Please, please, please, always wait for the candle to close before analyzing it! If you think you’ve seen a pin bar form on the daily chart at 17:00 GMT then you most certainly have NOT seen a pin bar. A price action candlestick bar cannot be categorized as a pin bar, inside bar, or anything else unless the candle has closed. Only once the candle has closed can you determine which category it falls under and decide whether you are going to place a trade or not.
Thank you for reading my trading lesson on price action pin bars, I hope you’ve found it extremely useful and feel well equipped to tackle these setups in the forex market now. Let’s just recap on the key points covered in this trading lesson. Pin bars are very obvious price action signals to identify on your forex charts, but you must wait for the candle to close before you can call it a pin bar. It’s important to understand the different ways to trade pin bars in range-bound market conditions versus trending market conditions to get the most out of your forex trades.
Lastly, it’s not always a bad thing to trade counter-trend pin bars, if you know how to reduce the risk of taking a counter-trend trade it can be a profitable setup to add to your trading plan and strategy and maximize the opportunities you’re able to take advantage of in the financial markets. Remember, pin bars are one of the most powerful price action trading tools you can use if you study their formation in the market and master the different ways to trade them I’m sure you will become a successful and profitable forex trader in no time at all.