All You Need To Know About Profit Taking Pin Bars ?

In today’s article, I’m going to be giving you a detailed breakdown of profit taking pin bars. The profit taking pin bar is, as the name suggests, created by the bank traders taking profits off their trades.

Most of the pin bars you’ve seen and traded are likely to have been profit taking pins, they are the most common type of pin bar that form in the market, and can be found across all time-frames. Unfortunately, they are also the pin bar which is most likely to result in you having a losing trade if you happen to trade one. You know I bet the vast majority of losing trades you’ve had trading pin bars, have come from you unknowingly placing trades based on seeing a profit taking pin form in the market.

Hopefully by the end of this article I’ll have given you enough information about profit taking pin bars that you’ll be able to determine when one has formed in the market and thus avoid accidentally trading one and having a losing trade.

 

How Do Profit Taking Pin Bars Form ?

If you’ve read my book “How The Large Institutions Operate In The Forex Market”, you’ll already know all the actions the banks can take in the market, like placing trades – closing trades etc. are entirely dependent on how many buy or sell orders are coming into the market from other traders placing trades.

Taking profits off trades is an action that can only be completed so long as the banks have enough buy or sell orders entering the market from traders placing trades. If we had a situation where the banks wanted to take some profits off a buy trade they had placed, the only way they are going to be able to take these profits is if other traders are coming into the market and placing buy trades of their own.

This is because when the banks take their profits, they are selling some of what they brought at a better price than what they brought it for. The only way they can sell is if they have someone else who is there to buy, if no other traders were coming into the market and buying, the banks wouldn’t be able to take any profits because they wouldn’t have anyone to sell to.

Whilst the bank traders are pretty much taking profits off their trades all the time, there are instances when they will end up taking a much bigger amount off. They’ll only do this when they have a large number of opposite orders coming into the market from people placing trades. Typically, the time when a large number of traders will be placing trades is when they are certain the market is going to continue moving in its current direction, such as when they see a sharp move higher or lower take place.

Once these traders have entered their trades, the bank traders will begin the process of taking profits off their own trades, the resulting price action will often be seen on your charts as a bullish or bearish pin bar.

Here’s an example of a bearish pin bar which formed because of the bank traders taking profits off buy trades they’d got placed earlier on in the move up.

Originally, when this bearish pin bar was in the process of forming, the candle would’ve looked extremely similar to the bullish large candle which formed an hour previous to the bearish pin. Lots of traders will have seen this large range candle and thought it was signal that a big move higher was about to take place. When the next hour begins, and the price starts to climb, masses of traders begin jumping into buy trades as they don’t want to miss out on what they assume is the beginning of a large move higher.

As the price rises, more and more traders start entering into long trades because their belief a large move higher is taking place, increases the further up they see the price move. The bank traders can see that a large number of traders have started placing long trades, and realize they now have an opportunity to take a substantial amount of profit off their own buy trades using the buy orders that have come into the market from the traders going long due to the move higher.

When the bank traders start taking profits, all the buy orders coming into the market from traders going long are consumed and the price begins to fall. At this point the traders who went long start closing their buy trades at a loss, closing a losing buy trade requires that you sell what you brought at a worse price than what you brought it for.

Essentially what this means is when the traders start closing their losing long trades, sell orders are put into the market which cause the price to fall even more, creating the wick we see on the bearish pin bar.

The process I’ve described above is what causes all bearish profit taking pin bars to form in the market, for bullish profit taking pins, the process is the exactly the same only the other way around.

Instead of taking profits off long trades, the banks are taking profits off short trades. The only way they are able to take profits off short trades, is if they have other traders come into the market and place short trades of their own. When the banks begin taking profits, the price starts to rise, which causes the traders who went short during the drop to begin closing their trades at a loss.

Closing a losing sell trade means your buying back some of what you sold at a worse price than what you sold it for, this means when the traders close their losing short trades, buy orders are put into the market which causes the price to rise, eventually resulting in the formation of the wick on a bullish pin bar.

 

How To Identify A Profit Taking Pin Bar

Before I show you how to identify a profit taking pin bar, it’s important for you to understand that it’s impossible to determine with 100% accuracy if a pin bar has formed as a result of the bank traders taking profits off their trades. The only time you can be pretty certain, is when the market has closed a certain number of pips past the high or low of pin bar itself.

Now even though we can’t be completely sure if a pin bar has formed because of the bank traders taking profits off their trades, by understanding when profit taking pin bars are most likely to form in the market, along with some simple facts about how reversals take place, we can determine with a high degree of accuracy if a pin bar has formed due to the bank traders taking profits.

image of institutional reversal pin bars The image above shows two bearish pin bars that were created by the bank traders placing sell trades to make the market reverse.

All pin bars which form as a result of the bank traders coming into the market and placing trades to make the market reverse, will always form as part of a larger reversal structure that will consist of multiple swings in the opposite direction to which the market is reversing.

image of reversal pin bars Notice how the market made four up-swings before this reversal took place ?

Each one of these up-swings formed because the bank traders were getting some of their sell trades placed. If you’ve read any of my other books you’ll know that when the banks want the market to reverse, they have to place their trades at different points in the market. They can’t just enter one huge trade at whatever price they want, as there won’t be enough orders coming into the market for their whole position to be filled.

What this means is before you actually see a reversal take place in the market, multiple swings will have formed from the bank traders getting their trades placed, just like we see in the example above.

Now what I’m saying, is if a pin bar was going to cause a decent sized reversal to take place, it must be accompanied by swings which have formed either previous to the pin bar or after the pin bar itself has formed, because we know when the banks are setting up a reversal they are unable to get all of their trades placed into the market at one price.

Also, the pin bar must have formed at a similar price to where the swings have formed. Because when the banks are getting multiple trades placed, they’ll always try to get them placed around the same price, as if it were the same as just placing one big trade into the market.

image of bearish profit taking pin barHere’s an example of a bearish profit taking pin bar which formed on the 1 hour chart of USD/JPY.


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As this point, we wouldn’t actually know if this is a profit taking pin bar, but what we would know from our understanding of how reversals take place in the market, is that with the current market structure being the way it is, it’s unlikely for this pin to be a reversal pin as no significant swing highs have formed recent to the pin appearing in the market.

Important Note:

A significant swing high is a swing high that causes the market fall a large distance after previously moving higher. The 4 swing highs seen in the image a couple of page ago are each considered to be significant because they all caused a large drop to take take place after they had formed.

In the image above you can see a swing high formed just before the profit taking pin formed. This swing high is not considered to be significant because it does not cause the market to drop a large distance after it’s formation. Swing highs which cause large drops are typically a sign of the banks getting sell trades placed into the market, if a swing high forms and the price only falls a small distance, more often than not it’s because the banks are taking profits off existing trades.

The same is also true for any swing lows you see form in the market.

If there was a significant swing high which formed recently around the same price as where the bearish pin had formed, it might have been worth placing a sell trade, but with the price action we’ve seen form so far, it’s looking likely this pin has been created as a result of the bank traders taking some profits off their buy trades.

This means you would not place a sell trade when the bearish pin first forms, because there isn’t enough evidence to suggest that it’s formed because of the bank traders placing sell trades to make the market reverse.

Even so, it doesn’t mean this bearish pin bar is definitely a profit taking pin ?

If you were to now see the market fall and move below the low of the move up seen after the drop from the swing high, there’s a high probability it’s because the bank traders are getting sell trades placed because they want the market to reverse.

In this scenario, you would be looking for entries short around the price at which the bearish pin formed, because you know any additional sell trades the banks might need to get placed, will be executed at prices close to where their other sell trades have been placed ( i.e the price region covered by the bearish pin )

image of bearish profit taking pin barHere’s an image of what happened in the hours after the bearish pin formed.

You can see the market continued to move up until it had broken through the high of the pin. When an entire candlestick ( from low to high ) manages to close completely past the high of the pin, you can be pretty sure the bearish pin has been created by the bank traders taking profits off their trades.

Really the main benefit you’ll gain from all this, is that from now on you’ll no longer need to enter a trade as soon as you see a pin bar form in the market.

Most traders upon seeing a pin bar form, will either enter a trade straight away or wait to see if the next candle is able to break through either the low of the pin ( for bearish pin bars ) or high of the pin ( for bullish pins ) before entering their trade. Unfortunately this leads to a large number of losing trades, because of the fact the traders don’t know what’s caused the pin bar to form in the market, which means they have no idea if the pin has a high probability of actually causing the market to reverse.

From now on, when you see a pin bar form, you know to first check to see if any recent significant swings have formed around the same price at which the pin has formed, because if they have, it means the pin is likely to have been created by the bank traders placing trades to make the market reverse. This is a situation where you would enter a trade as soon as the pin has formed, because there enough evidence there to suggest the reason why it’s formed, is because of the bank traders placing trades to cause a reversal.

Now if a pin appears and you see that no recent swings have formed around the same price as where the pin has formed, you know it’s likely to be because the pin has been created by the bank traders taking profits off their trades.

In this situation you wouldn’t place a trade when the pin has finished forming, but you would wait to see what the market ends up doing after the pin has formed, because if you see any significant swing highs or lows form around the same price at which the pin has formed, it’s a sign the pin has been created by the bank traders placing trades to make the market reverse.

 

When Are Profit Taking Pin Bars Likely To Form In The Market ?

Being able to determine if a profit taking pin bar has formed in the market is of course highly important when it comes to trading pins, but what’s also really important, is understanding the market structure that leads to profit taking pin bars forming in the market.

image of profit taking pin bar at resistance level Here’s an example of bearish profit taking pin bar which formed after a large move higher had taken place.

Important Note:

Notice how the pin bar above meets all the typical criteria price action traders use to determine if a pin bar has a high probability of causing the market to reverse ?

We can see it has a pretty large wick, the body of the candle is found right at the end of the pin and the pin bar itself ends up closing bearish. If that wasn’t enough, there’s also a 1 hour resistance level which happens to fall in-line with where the wick of the pin bar has formed. All of these factors suggested it was likely the pin bar was going to cause a reversal to take place, but as you can see that never happened, and instead the market went on to break through the high of the pin a mere two hours after it formed.

Most books and websites which teach traders how to trade pin bars, would’ve stated this was just one of those freakishly rare pins that had everything going for it, but still failed due to reasons they cannot explain. The reality is the reason why the pin didn’t cause a reversal to take place, wasn’t because it was one of those rare pins which end up failing for unknown reasons, it was because the pin bar itself did not form as a result of the bank traders coming into the market and placing sell trades to make the market reverse.

To be honest It makes very little difference how a pin bar is constructed or which technical levels it has confluence with. It’s far more important to understand what’s caused the pin bar to form because if it’s formed due to the banks taking profits off their trades, you know the chances of the pin causing a reversal to take place are very low regardless of how the pin bar itself is constructed or which technical levels it may have confluence with.

Okay lets get back to the example.

image of profit taking pin barAs you can see, this bearish profit taking pin bar formed right after a large move higher had occurred.

Most of the profit taking pin bars you will see form in the market will form after some kind of large movement has occurred. To really understand why, I want you to imagine for a minute that you had got a buy trade placed a few hours before the big move higher in the image took place. When the news, which I think caused this up-move to take place comes out, the market quickly shoots up which causes the buy trade you’d got placed a few hours before to go into a considerable amount of profit.

Now what’s the first thing your going to want to do with your trade being at such a large profit ?

Take Some Profits Off The Trade ?

Close The Trade Entirely ?

If you said take profits off the trade I’d agree. Most traders after seeing their trade go into a large amount of profit would want to take some of those profits off the trade, in order to make sure that no matter what, they are going to come out of the trade with a profit.

I can understand that some of you reading this are likely to have said “close the trade entirely ” Again, I agree this is a common course of action when you make a large chunk of money, but it’s important for you to keep in mind it’s the bank traders who have caused this move up to take place, they won’t be closing their trades as soon as the up-move has occurred, because they know the market is likely to continue moving higher.

So now we know for the most part, the majority of the traders in the market would want to take some profits off their trades as soon as they make a large sum of money, we can understand why profit taking pin bars are most likely to be found after large movements have taken place.

When large movements occur, the trades which the bank traders have got placed go into a large amount of profit. The banks decide to take some of their new-found profit off the buy trades and in doing so, they cause the market to move counter to the direction in which the large movement took place, the resulting price action this usually creates is either a bullish or bearish profit taking pin bar.


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The image above shows some pin bars which formed on the 1 hour chart of AUD/USD between the 23rd – 24th March 2016

You can see how each one of these profit taking pin bars formed right after a large movement had taken place in the market. Most of the large movements seen in this image consist of just one large range candlestick, but quite often you’ll see profit taking pins appear after movements which contain multiple large range candlesticks.

These are the types of movement you’ll see occur immediately before a profit taking pin forms on the charts. When you see large movements like this take place, be aware that any pin bars you see form shortly after are more often than not likely to have been created by the bank traders taking profits off their trades.

 

Summary

What I hope is obvious to you from reading this article is how most of the pin bars you’ve traded in the market up to this point, are likely to have been profit taking pins which never really had a chance of causing the market to reverse in the first place. Now you know when profit taking pins are likely to appear in the market, along with an understanding of how to determine what’s caused a pin bar to form on your charts, I’m positive your success rate trading pin bars will increase dramatically.

Below is just a small summary of the main points I want you to take away from this chapter.

  • Profit taking pin bars will usually form after a large movement has taken place. This is because large movements cause the trades placed by the bank traders to go into a large amount of profit and naturally, the first thing they want to do with this big profit, is secure some of it so that they can reinvest it into placing more trades.
  • If a pin bar forms and you notice there are other swings which have formed recently around the same price as where the pin has formed, you know it’s likely the pin is going to cause a reversal to take place because the swings are a good sign the bank traders are getting trades placed to make the market reverse.
  • On the other hand if you see that no swings have formed recently close to the price at which the pin has formed at, you know there’s a high probability the pin has been created by the banks taking profits off their trades.
  • Also, if a pin which you suspect to be a profit taking pin forms, make sure you keep watching the market after it’s formed to see if any other swings end up forming, because if they do, it could mean the profit taking pin is actually a reversal pin created by the banks placing trades to make the market reverse.
  • I would say that 70% of the pin bars you’ll see form in the market have been created by the bank traders taking profits off their trades. Pin bars may be frequent, but the ones which result in successful trades are far less common than you think.

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