The pin bar candlestick pattern remains one of the most popular and well-known price action patterns used by traders operating in the forex market. Unfortunately, whilst the pin bar setup may be as popular as ever, many traders are still have trouble trading the pins profitably. In my opinion, the main reason why is not because they’re doing anything wrong in regards to trading the pin bars themselves, it’s because a lot of the information they’ve been taught about pin bars was wrong in the first place. Information like “all pin bars form for the same reason” is not only completely incorrect, but is causing traders to lose vast quantities of money trading pins.
In today’s article, I want to clear up some of this incorrect information by giving you 5 tips that will change how you trade pin bars. These tips will not only dispel some of the myths you’ve been taught about pin bars, but will also show you how to trade them in a much more profitable way. By the end of today’s article, you’ll not only have a far better understanding of why you haven’t had much success trading pin bars, you’ll also know some things you can start doing right away to become more profitable trading them.
Lets take a look at the first tip, which as it happens is one of the best pin bar tips in the entire article.
Don’t Trade Pin Bars That Form After Large Movements Have Taken Place
One of the best ways to improve your success rate trading pin bars is to not trade the pins which form immediately after a large movement has taken place. These pin bars have a very low probability of being successful regardless of which technical levels they have confluence with or how they’re constructed. The reason why is because they mainly form due to the bank traders taking profits off their trades.
If you look at the bearish pin bar in the image above you can see it forms right after a sharp move higher has taken place. The move higher would’ve caused the buy trades placed by the bank traders to move into an amount of profit much bigger than what they at before. With their buy trades now at a large profit, the banks obviously want to secure some of these profits so as to be able to get more buy trades placed later on. The only way they can take profits off their buy trades is if they have buy orders entering the market. This means they have to take their profits when the market is moving higher, as that’s the only time when the majority of the orders coming into the market are buys.
When they take their profits, the sell orders which come into the market as a result are much bigger than the buy orders, which causes the market to fall and creates the bearish pin bar you can see on the image. Typical price action traders will see the pin bar and think that it’s a good signal to take a short trade, when the reality is that although the pin bar may cause a slight reversal to occur, it won’t be long before the market continues it’s ascent and breaks through the high of the pin, which you can see actually ends up happening in the example.
I hope this example has explained why it’s not a great idea to trade the pin bars which form after large movements have taken place. Don’t get more wrong, you will see the odd pin bar cause the market to completely reverse after large move, but vast majority of them won’t, at least not long enough for you to make a decent amount of profit off a trade. If you’re wondering what actually constitutes to a “large movement” just use the image above as a guideline. They’ll always cause the market to move a large distance and will always be constructed of large range candles. Most of the time you’ll see them form after high impact news events have been released, but sometimes they’ll form on their own without news being the catalyst.
Focus On Trading The Pin Bars Which Form From The Bank Traders Placing Trades
An unfortunate assumption made by the vast majority of education on pin bars, is that they all form in the market for the same reason, i.e because traders have placed trades to make the market reverse. Not only is this assumption wrong, it’s one of the main reasons why traders can never seem to make consistent money trading pin bars, no matter how much they end up learning about them. Pin bars do not all form from traders placing trades to make the market reverse. Some do, but the majority don’t, and these are the ones which most traders unfortunately find themselves trading time and time again.
The types of pin bar you want to be trading are the ones which form from the bank traders placing trades. These pins can either form with the trend, and act as continuation patterns, or against the trend and act as reversal patterns. The ones which are continuation patterns form the most frequently, but can be quite difficult to trade, due the knowledge required of where the banks themselves have got trades placed in the market. (This is something I talk more about in my Pin Bars Uncovered book)
Now although the pin bars which act as reversal patterns form far less frequently than the ones which act as continuation patterns, they are easier to identify and trade, as they only really form at one point in the market. That point is as one of the swing lows or highs created by the bank traders getting trades placed to make the market reverse.
These swing lows and the up-swings they created, all formed because the bank traders were getting buy trades placed to make the market reverse. If you look at the second swing low you can see it was created by a bullish pin bar forming. This is a bullish pin bar which has been created by the bank traders getting buy trades placed, one of the types of pin you want to be trading more often.
These pins always cause of the swing lows or swing highs of a reversal to form, so you need to watch for them to be created near the point where a recent retracement has originated from. In other words, if the market was trending lower and you saw retracement take place, you would want to start watching for a bullish pin bar to form around the point where the retracement started from, because if the retracement has been created by the bank traders placing trades to make the market reverse (at this point you’re probably not going to know), they’re likely to get more buy trades placed near to where they’ve already managed to get some executed, which is the source of the retracement.
Seeing a bullish pin bar form when the market reaches the source, would be a strong signal they are getting more of their buy trades placed, which means another swing higher is possibly about to begin, so getting a buy trade placed when the pin has formed, gives you the opportunity to possibly get into a high probability trade.
For bearish pin bars it would be the other way around.
If the market was trending higher, you would start watching for bearish pin bars to form after a retracement has taken place and the market is back at the point where the retracement originated from. If a bearish pin forms at the source of the retracement, it’s a sign the bank traders have got more sell trades placed, and that a second swing down is now likely to develop. By placing a sell trade once the pin bar has formed, you give yourself the opportunity to not only make money from the swing down, but also a much larger reversal that could eventually end up taking place.
It’s important to note that the pin bars which form from the bank traders placing their trades don’t always cause the second up or down swing of a reversal to take place. Sometimes they will cause the 3rd or 4th swings to form, so it’s a good idea to continue watching for pin bars to appear around the point where the retracement originated from, even after the second up-swing or downswing has taken place.
Stick To Trading The Pins Which Form During Active Market Hours
My next tip for trading pin bars, is to only trade the pins which form during the time a currency is actively traded, don’t take trades on any of the pins which form during inactive market hours. For example, EUR/USD is traded the most between the time the London trading session begins at 07:00 am, and when the US sessions ends at 10:00pm. After that the volume drops off significantly, because most of the banks which actively trade EUR/USD have closed by that time, so there’s no big orders coming into the market causing the price to move up and down.
The bullish and bearish pin bars you often see form during low activity periods do not have a high probability of working out successfully, due to the fact they have not been created by the bank traders taking some form of action in the market, like placing trades or taking profits. Typically the pin bars which form during this time, will overall be a lot smaller than the pin bars you commonly see form during active market hours.
You can see that the pins which formed during inactive hours (marked with arrows), were clearly much much smaller in terms of their overall range than the pin bars that formed during active hours (marked with X’s). Also if you look at the volume at the bottom of the chart, you can see the pin bars which formed during inactive hours had far less volume than the pins which were created during the active hours, clearly showing us the lack of bank trader participation during their formation.
Don’t Trade The Pin Bars That Form Against The Current Trend
This is probably the most obvious pin bar tip in the whole article, but it’s one which I think many traders still don’t understand properly. Don’t trade pin bars against the current trend, means don’t trade the pins which form against the current trend. It doesn’t mean just don’t trade the ones which fail to form at support or resistance levels, it means trade none of them at all, no matter how many technical levels they have confluence with. I know there are lots of traders out there who will trade the pin bars which form against the current trend, because the pin itself has formed at a technical level which they deem to be significant, like a support and resistance level for instance, (although not the type of support and resistance levels I talk about in my article).
They think that because it’s formed at a technical level that means it’s okay to trade the pin, because it’s assumed the level gives the pin bar a higher probability of causing the market to reverse than the typical pins which form against the trend. What the traders don’t realize, is that the levels themselves have no effect on the probability the pin bar has of causing the market to reverse. What really dictates whether or not a pin bar will cause a large reversal to occur, is what action has caused the pin to form in the first place.
If a pin has formed from profit taking (which most of them that form against the trend do), the market has a really low chance of reversing, no matter how many technical levels the pin may actually have confluence with. Conversely if one has formed from trade placing, which very few against the trend do, the market has a high probability of reversing, even if the pin has no confluence with any technical levels.
The only pin bars you should trade against the trend are the ones which form at the point where a recent retracement originated from, as these are the ones which have the highest probability of forming due to the bank traders placing trades, and thus have the best chance of actually causing a decent sized reversal to take place in the market.
Only Trade The Pins Which Form After The Market Has Shown Signs Of Reversing
This last tip kind of follows on from my previous tip, in that not only should you not trade the pin bars that form against the trend, you should also only trade the pins which form after the market has already given signs that it might be reversing, i.e after it has made a new higher high or lower low.
A large number of traders would have probably placed trades upon seeing these pin bars form, because they both had confluence with support levels that had formed previously. Unfortunately, despite the fact they had confluence with support levels, the majority of these pin bars wouldn’t have worked out profitably for the traders that had traded them.
The reason why is mainly because they formed due to profit taking, but also because the market hadn’t actually shown any signs that it was going to reverse before they formed. If you look at the image again, you can see that there was a bullish pin bar which formed after the market had broken above a recent swing high. This pin bar ended up being successful and caused quite a large upswing to take place after it’s formation.
It was successful not because it had formed at special support level or anything like that, but because it had formed from the bank traders placing buy trades to the make the price move up. You wouldn’t have known this for sure at the time of it’s formation, but you would’ve suspected it from the fact the market had already moved up and broken through a recent swing high before it formed. The break above the swing high is a sign the market wants to reverse, so the bullish pin bars that form after this has taken place, have a much better chance of being successful than the pins that formed before the swing high was broken, as there was no indication the banks wanted the market to reverse at that point.
The only time you should trade a pin bar before the market has shown signs that it’s reversing, is when a pin like I showed you earlier has formed near the source of a recent retracement, because in that scenario the retracement itself is a possible sign the market is going to reverse, the pin bar which can end up being created near the source just acts as confirmation.
Consistently making money trading pin bars will always be a really difficult task, due mainly to the flaws and assumptions found in the information given to traders in pin bar books and on price action websites. My hope is that this article has shone a light upon why some of the assumptions are wrong, whilst at the same time given you a few tips as to what you can do to trade pin bars more successfully in the future.
Thanks for reading. If you have any comments about the tips given in this article, or have any tips of your own which you would like to share, please leave them in the comment section below.