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Pin Bars Pattern [VIMALRAJ]

Vimal Raj at 09:00 AM - Dec 08, 2013 ( ) Views: 4,506

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Pin Bars Pattern

A pin bar is actually a candlestick pattern where the main body of the candle is very small with a long wick. The wick of the pin bar is two to three times the size of its body. Pin bar formations assist traders to find reversal setups for exhaustive trends and fading corrective moves for trend continuation setups.

Pin bars are also referred to as hammers/ hanging man and shooting stars. There are two types of pin bars namely: the bearish pin bar and the bullish pin bar. The bearish pin bar occurs after an uptrend and has a head with the real body and a long upper shadow.
Figure 1: Showing a bullish pin bar and a bearish pin bar

The color of the head can either be red or green and/or white or black depending on your bar chart. Bullish pin bars that have a bull close will be much stronger reversal signals than those with a bear close. Vice versa for a bearish reversal pin bar.
Figure 2: Showing a bullish pin bar in an uptrend and a bearish one in a downtrend

The bullish reversal pin bars are great indicators of the incoming profitability of the market while the bearish reversal pin bars signify the losses of the market. Acquaintance with pin bars will enable a price action trader to identify potential reversals and/or signifying a continuation depending upon the type and location.

Pin bars also occur at correction levels and main market turning points; including the falling trends, rising trends and range bound environments. Pin bars are most accurate trading indicators when they are joined with high support or resistance levels, main trend ratification, and clear formation.

Traders can make entries, exits and place stop-losses in the market simply by following the pin bars and how they form. They can enter a bullish or bearish pin bar as it breaks either the high or low of the real body depending on the direction of trading.

An effective pin bar trading strategy is vital to price action trading for identifying high probability setups. The pin bar can be traded on any time frame and from appropriate price action support and resistance levels.

How to Profit with Pin Bars

What are pin bars? Pin bars are single-candlestick reversal patterns. In other words, they are candlestick patterns which are made up of one single candle, often appearing at the top of a trend or at the bottom of a trend.

Pin bars are formed when there is a foregoing trend, and the pin bar candle opens and moves in the direction of the previous trend, only for traders in contrary positions to enter the market and drive the price of the asset in the opposite direction. The result is a candle that looks like a lollipop, with a long shadow, a short body oriented towards one end of the candle, and a short shadow on the other side of the body. The pin bar candlesticks are also known forex as:

a)      Hammer
b)      Hanging man
c)      Inverted hammer
d)      Shooting star

The hammer and inverted hammer are bullish reversal pin bars, while the shooting star and hanging man are bearish reversal pin bars.

Pin bars are very important price action patterns because their appearance is a signal that the sentiment in the market has changed, and that it may be time to unwind previous positions and take up new ones in the opposite direction (read this article for more on this).

The signals given by pin bars are not always accurate if you don’t really understand them in the context of the prior price action. For this reason, traders must use a means of confirmation or signal filtering to increase the accuracy of the pin bar signal.  But when combined with the right information and price action, they can be powerful signals and great way to enter the market.

Trading with Pin Bars

The process of trading with pin bars is simple.

a)      Identify the current trend.
b)      Identify the pin bar.
c)      Combine the pin bar with a method of trade confirmation (i.e. at key support and resistance areas, at event areas, pullbacks to the 20ema, etc)
d)      Execute the trade either at the open or on a 50% retracement of the pin bar

It is not usually hard to identify the current trend. Simply looking at the chart and the direction of the price movement will indicate what the trend has been.  You can also look for impulsive and corrective price action.

Identifying the pin bar is the next step. A true pin bar can be recognized by the following characteristics:

a)      It has a short body
b)      It must have a long shadow on the end that is opposite the direction of the trend, in the direction of the reversal
c)      The pin bar should ideally have a closing price that is lower than the open price for a bearish reversal pin bar, and close above the candle open if the pi nbar is a bullish reversal pin bar.

Only pin bars located at either end of the trend should be used. Pin bars occurring at areas of market consolidation or in the middle of a trend will not produce good trading opportunities.

Once the pin bar occurrs at the top or bottom of a trend, and has been identified, it is time to combine the pin bar with a method of trade confirmation. One of the best methods of trade confirmation is by checking to see if the pin bar is at a strong region of support or resistance where price action has had a strong reaction in the past.  You can call these event areas, or areas of impulsive price action.

On intraday price action trading, using pivot points for the day works pretty consistently. All a trader needs to do is to download an automatic pivot point tool, apply it to the chart, and the key levels of support and resistance will be displayed.

Typically, the opportunity is to look for where a bearish pin bar forms on a resistance (R1, R2, R3) or where a bullish pin bar is on a support (S1, S2, S3). These are shown in the charts below:

From: vimal raj at 09:03 AM - Dec 08, 2013( )

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.

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.

From: vimal raj at 11:30 AM - Dec 08, 2013( )

From: vimal raj at 08:47 PM - Dec 23, 2013( )

In the picture above, you’ll see two occurrences of the hammer candlestick formation. The first hammer (pictured on the left) did not work out. You would have been stopped out if you had placed your stop loss one pip below the bottom of that hammer.

Using the stochastic oscillator would have given you a clear signal to stay out of the first trade, because the hammer occurred during a cycle high (according to the indicator) and near the overbought level (80). Since the hammer is a bullish reversal signal, we would prefer the stochastic indicator to be in or near the oversold area (20). This would have been one indication to stay out of that trade.

The second hammer formation (pictured on the right) worked out nicely. Price never came close to taking the stop loss out before surging upward. In this case, the stochastic oscillator indicated that price was making a cycle low and was near the oversold level (20). Let’s take a look at another 

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Ben Benhar at 10:41 AM - Dec 08, 2013 ( )

Thanxxxx Vimal for such training notes in very concise form....

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