The pin bar is a general name that refers to candlestick patterns like the hammer, shooting star, gravestone doji, dragonfly doji, inverted hammer, and the hangman.
Those are single-candlestick patterns with a small or no real body, a long wick at one end, and little or no wick at the other end.
When mastered, pin bar trading strategies can be one of the most profitable price action strategies to trade.
There are many different descriptions of pin bar trading strategies out there, but you can’t make a penny with most of them.
You know why — they don’t consider the big picture or the context of the price action.
In this piece, i will show you the pin bar trading signals that work, but first, you need to understand the anatomy of pin bars and the psychology behind their formation.
Anatomy of pin bars
A pin bar is a candlestick with a long upper or lower wick (shadow), a small or no real body, and little or no wick on the other end.
The long wick is often called the tail, while the small wick at the opposite end is referred to as the nose. The tail makes up about two-thirds or more of the entire range of the candlestick.
The body is the part between the open and close prices, and it can have a bullish color (white, green or whatever color you use to denotes bullish candlesticks) or a bearish color (black, red, etc.) when the price closed below the open.
However, the color doesn’t determine whether a pin bar is classified as bullish or bearish. What determines the type of a pin bar, bullish pin bar or bearish pin bar, is the position of the tail.
A bullish pin bar is one that has a long lower wick or tail and a small or no upper wick (nose).
The real body is small and located near the upper end of the candlestick and can be of any color.
A bullish pin bar can be a hammer, hangman, or dragonfly doji pattern, but only the hammer and a dragonfly doji at the end of a price swing down are considered valid bullish pin bars.
A bearish pin bar is one that has its tail above the body and a small or no wick at the lower end. The real body is small and located near the lower end and can be of any color.
On the chart, bearish pin bars appear as the shooting star, gravestone doji, or inverted hammer pattern, but only the shooting star and gravestone doji at the end of a price rally can be considered valid bearish pin bars.
The psychology behind pin bar formation
A pin bar represents the battle between bulls and bears during a trading session.
It shows how price momentum shifts from bearish to bullish or from bullish to bearish within a trading session.
In a bullish pin bar, the bears were initially in control of the market, pushing the price low, but at some point, the bulls came in and furiously seized control of the session, pushing the price up to close above or near the open price.
If the price closed above the open price, the bullish pin bar will have a bullish-colored body, but if it closed below the open price, the body of the bullish pin bar will have a bearish color.
The bullish pin bar usually forms around price support levels, with the tail often hanging below the level — as can be seen in the chart above.
So, the implication is that the price was rejected at those lower levels as it met a lot of buy limit and stop loss orders.
In a bearish pin bar, the buyers were dominating in the early phase of the trading session and pushed the price higher, but later on, the sellers took control and forced the price down to around the open price.
A close below the open price means that the body of the pin bar will be bearish, while a close above the open price would give the bearish pin bar a bullish color.
The bearish pin bar occurs mostly around a resistance level, with the tail hanging above the level — see the chart above.
This shows that the price is rejected at the level due to the presence of many sell limit and stop loss orders around there.
Trading pin bars with the trend
The pin bar price action pattern can occur anywhere in a price chart, but not every pin bar setup you see is worth trading.
Entering a trade just because you see a pin bar pattern is a recipe for failure.
You must have a way of identifying other confluence factors that can increase the odds of a successful outcome.
As veteran traders always say, “the trend is your friend.”
One pin bar trading strategy that works for both amateur and professional traders is trading in the direction of the trend, especially when combined with other supporting factors, such as :
- Support and resistance levels
- Fibonacci tools
- Moving averages
- Trend lines
Support and resistance
A trending market normally moves in waves — impulse wave (in the direction of the trend) and corrective wave (against the trend direction).
The corrective waves are also called pullbacks. These waves create a series of support and resistance levels, which are levels at which one wave ends and another begins.
Since the setups are reversal candlestick patterns, it’s best to look for a pin bar trading signal at the end of a pullback so that you can ride the next impulse wave in the direction of the trend.
Pin bar setups that appear against the direction of the trend are not high probability setups.
Here is the thing — in an uptrend, pullbacks tend to end at support levels, while in a downtrend, pullbacks end at resistance levels.
So, if the market is trending up, look for bullish pin bar patterns at support levels.
In other words, wait for a pullback to a support level and watch out for a bullish pin bar.
It’s interesting to note that when the price breaks above a resistance level in an upward trending market, that level becomes a support level as you can see in the chart below.
In a market that is trending down, you look for bearish pin bar patterns at resistance levels.
Here is what you do: wait for the market to rally to a resistance level and watch out for a bearish pin bar.
The EUR JPY H4 chart below shows how the price broke below the support level, which then became a resistance level.
The price rallied to test that level twice. On the second attempt, it formed a bearish pin bar trading signal and the price started to decline again.
Fibonacci retracement
Another tool you can use to trade the pin bar Japanese candlestick is the Fibonacci retracement tool. The Fibonacci retracement levels indicate the percentage of the preceding impulse wave which the corrective wave can retrace to.
The levels are derived from the various ratios of the Fibonacci sequence. but the significant ones include 38.2%, 50%, and 61.8%, which normally act as support and resistance levels in a trend.
To use the Fibonacci retracement tool, attach the tool to the preceding impulse wave, from the low to the high, when a pullback starts. Watch for a pin bar setup when the price reaches any of the significant levels.
In the AUD USD chart below, the price is in an uptrend, so the Fibonacci retracement levels are acting as support levels.
Notice that the price formed a nice bullish pin bar when it got to the 50% retracement level. Coincidentally, that level is also a known support level.
The EURJPY chat below is in a downtrend, so the Fibonacci retracement levels act as resistance levels.
A bearish pin bar was formed around the 50% Fibonacci retracement level, and the price fell thereafter.
Moving averages
The moving average indicator can be a very helpful tool when it comes to pin bar trading strategies, and here’s why.
It can help you identify the direction of the trend if you can’t read it from the price waves.
Additionally, it can act as a dynamic support or resistance level from where the price can bounce off.
There are different forms of moving averages, and you can choose any period you want. However, we like using an 8-period or 21-period simple moving average at session close.
When using a moving average indicator to trade a pin bar strategy, wait for the price to pull back to the indicator line and look for a pin bar setup.
The AUD USD chart below shows a market that is gradually trending up and frequently making pullbacks to the 21-period moving average.
In the last pullback, a bullish pin bar formed right on the moving average indicator and the price started climbing again.
In a downtrend, the moving average indicator acts as a dynamic resistance level, as you can see in the XAUUSD chart below.
On several occasions, when the price attempted to rally, it got rejected around the level of the indicator and formed a bearish pin bar, leading to a price decline.
Trend lines
Trend lines are simple tools that help to delineate the trend but also acts as a dynamic support or resistance level.
In an uptrend, you draw your trend lines at swing lows, so they act as support levels. Conversely, in a downtrend, you draw trend lines along swing highs, where they act as resistance levels.
ThAUD USD chart below shows a market in an uptrend with occasional pullbacks to the trend line.Notice how some of those pullbacks ended with a bullish pin bar and the price reversed to the upside
In the GBP USD chart below, you can see a market in a steady downtrend. Notice the bearish pin bar that formed at the end of a pullback to the trend line and how the market dropped after that.
Pin bar order entry and exit strategies in a trending market
There are several ways to enter a trade when using pin bar trading strategies.
You can place your trade as a market order (filled at any available price in the market) immediately when the next candlestick opens after the pin bar has completed.
Alternatively, you can place a stop order a few pips above the high of the bullish pin bar or the low of the bearish pin bar, as the case may be.
Another option is to place a limit order around the middle of the pin bar’s tail.
Whatever method you want to use, you must wait until the pin bar has closed before placing a trade, to be sure it’s a pin bar.
If you are going long in an uptrend, place your stop loss below the preceding swing low. You can also place it some pips below the bullish pin bar’s low, but there’s a higher chance of being stopped out.
For short trades in a downtrend, place your stop loss above the preceding swing high. Alternatively, place it some pips above the bearish pin bar’s low, but the chances of being stopped out are higher.
For your take profit, you can try any of these options :
- A 2:1 or 3:1 risk/reward ratio
- Fibonacci extension or expansion levels
- The next support or resistance level
- The average size of impulse waves in the trend, measured from the low/high of the pin bar
Trading pin bars in ranging markets
Apart from trading pin bars with the trend, another pin bar trading strategy that can improve the odds of successful outcomes is trading pin bar setups in a ranging market.
A ranging market is a market that moves sideways, without making any significant displacement to the upside or downside.
A ranging market is easy to trade if you know how, but you must be ready to get out quickly if the price breaks out of the range zone since the market can move really fast after a breakout.
Here are the tools that can help you when trading pin bars in ranging markets:
- Support and resistance zones
- Oscillator indicators
Support and resistance zones
The first thing you need to identify when trading a ranging market is the boundaries of the range.
The upper boundary marks the resistance zone, while the lower boundary is the support zone.
The price is likely to reverse when it hits these zones, but from time to time, it does overshoot the boundaries and gets sharply rejected.
Those rejections beyond the boundaries often give rise to pin bar Japanese candlesticks, which is what you want to trade.
The strategy is straightforward:
- Find a ranging market
- Mark the upper and lower boundaries
- Wait for the price to overshoot the boundaries and get rejected, forming a pin bar trading signal
In the AUD USD chart below, the market was in a range. On two occasions, the price pierced the lower boundary, formed a bullish pin bar, and traded up to the opposite boundary. The price overshot the upper boundary once and formed a bearish pin bar — notice the drop that followed.
Oscillators
Oscillators are one of the best indicators for trading a ranging market.
There are many oscillator indicators available to traders, including stochastic, RSI, CCI, OsMA, Williams %R, and others.
They are formulated to move between overbought and oversold regions or oscillate about a midline as the price bounces up and down within a range.
The signal from an oscillator often involves the indicator coming out from the overbought region (a sell signal) or the oversold region (buy signal).
Another type of signal from an oscillator is when there’s a divergence between the oscillator and the price swings.
In the AUD USD chart, the bearish pin bar at the upper border coincided with a classical bearish divergence in the RSI indicator, and an overbought signal from the same indicator.
Pin bar order entry and exit strategies in a ranging
market
When using the pin bar trading strategy in a ranging market, it’s best to enter your trade once the pin bar has completed.
You can use a market order immediately the next candlestick opens, or you place a stop order above the bullish pin bar’s high for a long trade or below the bearish pin bar’s low for a short trade.
For a long trade, place a hard stop loss a few pips below the bullish pin bar’s low. If you are short, place your stop loss a few pips above the high of the bearish pin bar.
You don’t want to be in the market when the price eventually breaks out of the range. For your take profit, place it a few pips before the opposite boundary.
Mistakes to avoid when trading pin bars
Although the pin bar Japanese candlestick can present some trading opportunities, many traders get it wrong when trading the pattern.
It’s important you know the common mistakes traders make when using pin bar trading strategies and how to avoid them.
Here are the four main mistakes to avoid:
Going against the trend
It is quite naïve to think that a trend will reverse just because a pin bar has formed.
Going against the trend reduces the odds of any trade setup, and the pin bar setup is not an exception.
A market in a trend remains in a trend until the trend reverses — Dow’s Theory.
This GBP CHF chart shows several bearish pin bars that formed in an uptrend, and if traded, all would have resulted in failed trades.
Trading pin bars alone
It’s wrong to trade pin bars alone. While they indicate price rejection, you need other factors to confirm that the price is actually going to move the direction you intend to trade. Pin bars alone don’t offer high probability trades.
Moreover, pin bars are not the only candlestick patterns that indicate price rejection. Other patterns, like the engulfing patterns, piercing pattern, and dark cloud cover also represent price rejections, and in a timeframe that converts the two candlesticks to one, those patterns would appear as pin bars.
So, looking for pin bars alone will lead to missing so many trading opportunities. It’s better to understand what the price action is saying in each market context.
Taking all pin bars as the same
All pin bars don’t have the same significance, so it’s wrong to treat them as the same.
A bullish pin bar with a long tail protruding below a strong support level cannot have the same effect as one with a short tail barely hanging on a not-so-significant support level.
The former must have triggered a lot of buy limit and stop loss orders, which can force the price up, while the latter doesn’t.
Putting stop loss too close to the entry
It is dangerous to put your stop loss close to your entry. You may think that everyone knows that, but a lot of people still make that mistake.
When a stop loss is too close to the entry, it doesn’t allow for the normal price gyrations, so the chances of being knocked out before the trade takes off is high.
Final words
Pin bar trading strategies can be profitable if you master it and be consistent with your implementation.
The pin bar price action pattern works well when trading in the direction of a trend using support and resistance levels, Fibonacci retracement levels, moving averages, or trend lines as supporting tools.
It also works fine in a ranging market. Don’t make the mistake of trading against the trend ; always use a reasonable stop loss, and above all, try to understand how to read price action — don’t just memorize patterns.