The Pin Bar: A Powerful Forex Trading Setup

October 11, 2010 Forex Trading, Forex Trading Setups, Investing/Trading

We all know the industry legend that 95% of traders lose money and give up trading. The reasons that traders fail are many, but most, if not every single reason, can be broken into to basic reasons:

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The trader did not have a strategy that yields positive expectancy.
The trader did not execute the strategy properly.

Trading really is that simple. Unfortunately, these two steps are very difficult. The first step is essential, though. If a trader does not have a strategy that yields positive expectancy, he has no hope of becoming a successful trader. Let’s define positive expectancy.

When you decide to adopt a specific strategy or approach to trading financial markets, it is essential that the strategy yield positive expectancy when backtested over historical data. Past price data can never indicate whether a particular strategy will continue to be profitable in the future, but, on the other hand, if it has not been profitable in the past, then the probability of it performing well in the future is very low, if there is any at all.

Thus, you need to test your strategy over past price data to confirm that it yields positive expectancy, meaning it makes money over time. If it does, then you have a strategy with positive expectancy, and this is the first step to becoming a successful trader. Unfortunately, that is still the easy part. Implementing the strategy without failure is where the difficulty comes in.

In this article, we are going to discuss a very simple, but powerful price action trading strategy that can be used trading any financial market.

The Pin Bar

The above picture is a perfect example of a pin bar. A pin bar is essentially a candlestick that closes with a very small body and a very long wick in 1 direction. Martin Pring wrote a book, Pring on Price Patterns, in the mid-2000’s, and in it he identified this candlestick formation. In Pring’s research he began to notice this candlestick formation appearing at the tops and bottoms of large market reversals, and he ended up discovering that this small candle oftentimes indicates possible trend exhaustion and possible reversal.

How To Trade The Pin
First of all, not all pin bars are created equal. Thus, in order to trade this strategy properly, you should only trade the most defined pin bars that form in currency trading.

Key Levels
The best pin bars form at significant areas of support/resistance. Therefore, you do not want to trade pins that form in the middle of consolidation. Instead, you want to trade them at exhaustion points of strong support/resistance as determined by the use of price action analysis via trendlines, fib levels, pivot points, previous swings, etc.

Trend is Your Friend
The best pins form in the direction of the overall trend. Thus, if the overall trend is bullish and a bearish correction forms, you want to look for a pin bar to form during the bearish correction as a signal that price is about to resume the bullish trend.

Entry & Exit
Entry is always on the break of the pin bar’s nose and the stop loss is always placed a few pips beyond the pin’s wick.

Timeframes
In classical technical analysis, it is known that technical setups that occur on higher timeframes tend to be more reliable because the setup is encompassing a wider set of data. Thus, a price pattern on a 4 Hour chart will tend to be more reliable, then a similar price pattern that occurs on the 5 Minute chart. Pin bars are no different. The best pin bars are those that form on the 4 Hour and Daily chart.