The Definite Guide To Trading Pin Bars

In today’s article, I’m going to give you a step by step walk-through on how to trade pin bars. Knowing how to trade pin bars is one of the key skills you need to acquire as a forex trader, because they’re one of the most common price action patterns you’ll be seeing form on your charts. Luckily, trading pin bars on their own is not that difficult, and only requires that you have a small amount of knowledge on why pin bars form in the market, which you can easily gain by reading my article on understanding pin bars.

Before we start, I want to make it clear that this trading strategy is aimed squarely at beginner price action traders, traders who do not have much experience trading the forex market. Whilst it is possible to make decent money using the strategy I’m going to be showing you today, it’s main purpose is to give you some much needed experience trading the market. To really use pin bars as a viable trading strategy, you need understand them on a much deeper level. This understanding can be gained by reading some of my other pin bar articles or by purchasing my book on pin bars which you can learn more about on the cool stuff page.

 

Step 1: Determine The Direction Of The Current Trend

So the first step to trading pin bars, is to determine which direction the market is currently trending in on the time-frame you use to place all of your trades off.

To determine which direction the market is currently trending in you need to look to see if the most recent swing low that’s formed in the market is lower than the previous swing low, or if the most recent swing high is higher than the previous swing high. If the low is lower it means the trend is currently down and if the high is higher it means the trend is up.

image of swing low followed by lower swing lowHere’s an image of the market making a swing low which was lower than the previous swing low that had formed in the market.

When this lower swing low is made you would begin looking for entries into short trades because the trend is now considered to be down. If a bearish pin bar formed at a level of resistance after this lower swing low had been made, you would enter a sell trade because the bearish pin bar would be a signal the market is likely to going to continue moving lower.

image of swing high followed by higher swing highThis image shows the market making a swing high higher than the previous swing high that had formed in the market.

When you see the swing high broken by a higher swing high, you’d start looking for opportunities to go long as you know the market is in an up-trend. If a bullish pin bar was to now form at a level of support you had marked on your charts, it would be a good idea to place a buy trade, because the bullish pin bar would be a sign the up-trend is going to continue.

One thing which a lot of price action traders try to do when trading pin bars, is trade the pins which form counter to the direction the market is currently trending in. In other words, if the trader had determined the trend to be down, instead of trading the bearish pin bars which signaled a continuation of the downtrend, the traders would trade the bullish pin bars and attempt to predict where the whole downtrend was going to come to an end.

The traders who trade like this usually end up losing money on lots of their trades because they don’t understand the reasons why pin bar form in the market. All pin bars form as a result of the bank traders either placing trades to make the market reverse or from taking profits off trades which they’ve already got placed. When the market is in a downtrend, most of the bullish pin bars that form have formed because the bank traders are taking profits off sell trades placed earlier on in the downtrend. Because the bullish pin bars have formed as a result of profit taking and not trade placing, it means they have a small chance of causing a reversal to take place in the market, due to the fact the banks still want the market to continue falling so they can make more money of the sell trades they’ve already got placed.

The same thing happens with the bearish pin bars that form during up-trends. When the market is in an up-trend the majority of bearish pin bars that form have formed because the bank traders are taking profits off the buy trades they’ve got placed. The bearish pin bars are unlikely to cause the market to reverse, because the bank traders still want the market to continue trending higher.

 

Step 2: Enter The Trade

Once you’ve identified a pin bar has formed in the market the next thing to do is enter your trade.

All pin bar trades must be entered using market orders. A market order is where your trade will be placed as soon as you click the “Place Trade” or “Execute Order” button on your brokers trading platform. A lot trading guides I’ve seen teach people to enter pin bar trades using pending orders placed either at the low or high of the pin bar once the pin has formed in the market. In my opinion this is an inferior method of entry due to the fact your trade is only going to be placed if the market manages to break through the high or low pin. There are lots of times when the market will not break through the high or low of the pin before reversing. In situations like this you will have to sit and watch as a trade you could have been had you used a market order goes on to be a profitable trade without you, all because you used a pending order to enter your trade.

You will never have this problem when you use market orders because your trade will be placed as soon as the pin bar has formed, regardless of whether the market ends up breaking through the high or low of the pin bar.

 

Step 3: Place Your Stop Loss

Before you actually enter your trade there is one final thing you need to do.

You need to make sure you have a stop loss placed with your trade.

If you don’t have a stop loss placed with your trade, the potential amount of money you can lose on the trade is theoretically unlimited. (Although it must be said that in most cases the trading broker will close your trade automatically when you have lost all of the money in your trading account).

Making sure you have a stop loss placed with every trade is easy, if you’re a beginning trader and don’t know how to place stops, I recommend that you check out this small article I made about stop losses last year. In the article I’ll teach you everything you need to know about stop losses, like why it’s so important to have a stop loss placed with each trade you take, and a real world example of what can happen if you decide to place a trade without a stop.

If you already know how to place stops losses, the only thing you need to learn is the location of where you put your stop when placing a pin bar trade, which is what I’m going to show you now.

 

Stop Loss Location For Bullish Pin Bars

When trading bullish pin bars you always need to put your stop loss a few pips below the low of the pin.

image of stop loss postion for bullish pin bar setups

In the image above you can see I’ve marked a bullish pin bar with an X. If you were planning to place a buy trade upon seeing this bullish pin bar form, you’re stop loss would need to be placed somewhere around the point where I’ve marked the black line, not right below the low of pin bar, but a small distance away from it.

 

Stop Loss Location For Bearish Pin Bars

With bearish pin bars your stop loss always needs to be placed just above the high of the pin.

image of stop loss postion for bearish pin bar setups

Similar to the last image, the black line I’ve marked on the image above shows roughly the place where you want to put your stop loss when trading any bearish pin bars you see form in the market.

You can place your stop loss right below the of the pin or right above the high of the pin if you want, but I personally wouldn’t recommend it, based on the fact that a lot of the time the market will end up spiking through the high or low of the pin bar before reversing. If you have your stop placed right at the high or low when this occurs, you will be stopped out of your trade and will lose money.

 

Quick Tip: Make Sure The Body Of The Pin Bar Closes Into The Body Of The Previous Candlestick

Something which I suggest you do if you’re new to trading pin bars, is only trade the pins which have their body close into the body of the previous candlestick.

image of bearish pin bar on 1 hour chart of usd/jpyHere’s an example of a 4 hour bearish pin bar which had it’s body close into the body of the bullish candlestick that formed the hour before.

You can clearly see the entire body of the bearish pin bar is contained completely within the body of the bullish large range candlestick which formed the previous hour.

image of bullish pin bar which does not close into the body of the previous candlestickHere’s an example of a bearish pin bar which didn’t have its body close into the body of the previous candlestick.

You can see the body of this pin bar closes into the wick of the previous candle, not the body like we saw in the previous image.

The pin bars which have their body close into the body of the previous candlestick have a slightly better chance of working out successfully than the pin bars which have their body close into the wick of the previous candlestick. The reason why is because when the pin bar body has closed into the body of the previous candle, it’s a sign the momentum in the market has shifted and the price is about to move in the direction the pin bar is suggesting. The momentum has shifted because the market has broken through the source of the up-move or down-move that caused the pin bar to form in the first place.

image of bearish pin bar on 1hour chart of usd/jpyHere’s an image of a bearish pin bar which formed on the 1 hour chart of USD/JPY.

We’re going to take a look at how this pin bar was constructed on the 5 minute chart, so you can see where the up-move which caused the pin bar to form originated from and the point where the market broke it.

image of bearish pin bar on 5 minute chart of usd/jpyHere’s what the bearish pin bar looks like on the 5 minute chart.

The blue vertical line I’ve marked designates the point where the formation of the pin bar begins and the red vertical line marks the point where it ends. The area I’ve shaded in orange is the up-move which causes the pin bar to form and the up arrow shows the point where it originated from. You can see by the time the formation of the pin bar has come to an end ( marked with the red line ) the market has dropped and broken through the point where the up-move which caused the pin bar to form started from.

Because it has broken through this point, it means whatever buy trades the bank traders placed to cause the up-move to occur in the first place have now been closed, which suggests we are going to see further down movement take place in the market.

Of course not all pin bars which have their bodies close into the body of the previous candle manage to break through the point where the up-move or down-move originated from. The majority of them will but a few of them won’t, which is why it’s always a good idea to check how the pin bar you plan on trading has formed on the 5 minute chart before you trade it. If you see that the market has broken the low of the up-move (or high of the down-move if you were trading a bearish pin bar) you know it’s a good idea to take the trade because the chances of the market reversing are a little bit higher.

Most of the pin bars which don’t have their body close into the body of the previous candlestick will not break through the point where the up-move or down-move which created the pin bar originated from. Again, some will but the vast majority won’t, so it’s best to just stay way from trading these pin bars until you have more experience in the market.

 

Step 4: What To Do Once You’re In The Trade

After you’ve got your pin bar trade placed, it’s a good idea to go and find something else to do for the next couple of hours, because one of the biggest problems new and old traders have when trading the market is closing a trade prematurely before it’s had a chance of being successful.

The main reason traders end up closing their trades prematurely, is because of what they do immediately after they’ve got their trade placed. Most traders after getting a trade placed will watch the unfolding price action to see if their trade starts going into a profit or at a loss. What often happens is there will be some kind of movement in the opposite direction to which the trader has got his trade placed and he will suddenly find himself at a loss on his trade. Keep in mind the stop loss on the traders trade has still not been hit, so technically he hasn’t actually lost any money on the trade yet, but he will if the market continues to move against him.

As the market moves closer and closer towards the traders stop loss, the trader decides to close his trade so as to not let his loss get any bigger and potentially lose any more money on the trade.

When the trade has been closed the trader breathes a sign of relief and believes closing the trade was the right decision to make.

It will be at this point where the market starts to move back in the direction to which the trader originally had his trade placed. The trader helplessly watches as the market moves further and further in the direction he had initially predicted without him, all because he closed his trade without giving it a chance to be successful.

Situations like this are massively frustrating and are caused solely by the trader sitting and watching the price action that forms after his trade has been placed.

Although this is an issue which can never fully be rectified, due to the fact at some point you are going to have to look at your trade and it might be at a loss even two or three hours after after being placed, by at least leaving it alone for a couple of hours you’re giving yourself a chance to calm down and re-asses your thoughts on the market. When beginning traders place trades they tend to feel a rush of excitement similar to what gamblers experience when they make bets. This rush causes the trader to become emotionally involved with their position, which heightens the risk that they may make some kind of snap decision whilst monitoring their trade.

By finding something else to do after getting your trade placed, you negate the risk of making a snap decision which you’ll later end up regretting, because you won’t be there monitoring your trades progress. You’ll still experience the rush of placing a trade, but you won’t be there to act on it so it’s effect on your trade will be negligible.

If you find that your trade is in a profit after a couple of hours of doing something else, the next thing you need to do is decrease the risk on your trade so that if the market moves against your position, you won’t end up losing any money.

Decreasing the risk is done by moving your stop loss from the point where you placed it when you got your trade placed (either the high or low of the pin depending on the pin bar) to the price at which your trade was placed. As an example lets say the price your pin bar trade was placed at was 125.100 and the price your stop loss was placed at was 125.000. In order to decrease the risk on your trade to the point where it’s not possible for you to any lose money, you’d have to move the stop loss from 125.000 to 125.100. If the market fell back to 125.100 after you had moved the stop loss, it would hit your stop and your trade would be closed without you losing any money.

Although you can decrease the risk on your pin bar trade at any time, it’s best to do it when you have some kind of confirmation the market is going to continue moving in the direction you’ve got your trade placed, because if you do it before, there’s a chance the market could move against your trade and take you out just before moving in the direction you anticipated.

Of course we don’t want this to happen, so the best way to avoid it is to only move your stop loss once you see the market has made a new higher high if you’ve placed a buy trade, or a new lower low if you’ve placed a sell trade.

image of bullish pin bar forming after swing high was made Here’s an image of bullish pin bar that formed on the 1 hour chart of USD/JPY.

If you had placed a buy trade upon seeing this bullish pin bar form (you wouldn’t because it’s not a great pin bar) your stop loss would be moved once you saw the market make a high higher than the one I’ve marked in the image.

image of the market making a higher high after a bullish pin bar had formedAs you can see, a few hours after the bullish pin bar had formed, the market moved up and made a new high which was higher than the previous high that had been made in the market. When you see the market make this new high, you would move your stop loss from just below the pin bar low to the price at which your pin bar trade was executed at. In this example your pin bar trade would’ve been executed around the 124.570 level, so when you see the market make the new higher high, you’d move your stop to this price to decrease the risk on your trade.

image of bearish pin bar forming after swing lowHere’s an example of a bearish pin bar which formed on the 1 hour chart of EUR/USD.

If you were trading this pin, you’d move your stop loss from the high of the pin bar to the price at which your trade was placed, after seeing the market make a low lower than the most recent low that has formed in the market.

image of bearish pin bar after the market has made a new lower lowYou can see three hours after the bearish pin bar formed, the market dropped and made a new low which was lower than the previous low. At this point your stop loss would be moved from the high of the bearish pin bar to the price your sell trade was placed at, which in this example happens to be around the 1.10650 level.

When you’ve decreased the risk on your pin bar trade to the point where you can no longer lose any money, the final thing you need to do is close the trade and bank the profits you’ve made. I’m not going to go into detail about when or where you should begin taking profits off your trades, but what I will say is that if you place a trade and find yourself in a really large profit a short time later, it’s best to close the trade and bank your profits or at least take a large amount of profit off the trade by moving the stop loss past the point where you entered your pin bar trade. (Check my article on stop losses to learn how to do this)

Summary

The really great thing about pin bars, is the variety of different ways in how you can trade them. What I’ve explained in this article is just the most basic method of trading them. There are lots more systems out there which combine pin bars with other tools or methods of analysis that will allow you to trade them more effectively.

I’ve put a link below to another article I have on this site which will show you how to trade pin bars at support and resistance levels. Check it out if you get chance, because it’s a great strategy to use, especially if you’re a beginner trader who is just starting to learn how to trade the market using price action trading strategies like the pin bar.

How To Trade Pin Bars At Support And Resistance Levels

 

 

 

4 Comments

  1. Steve Kobb
    • ForexMentorOnline
  2. Will
    • ForexMentorOnline

Reply

Get My FREE 6461 Word Book On Supply And Demand Trading

Lear to trade the same way the pros do!
No Thanks, I prefer to Lose Pips :(
close-link

Want Free Forex Trading Signals?

Get Supply & Demand Trade Levels Weekly Into Your Inbox!

Plusss...
  • My 6461 Word Book On Supply And Demand Trading 
  • How Old Supply And Demand Zones Do Not Cause The Market To Reverse And The Reason Why Traders Mistakenly Believe They Do
  • Why The Time It Takes For The Market To Return To A Supply Or Demand Zone Will Determine Weather The Zone Has A High Chance Of Causing A Reversal To Take Place
  • The Differences Between Zones Created By Bank Traders Taking Profits And Zones Created by The Bank Traders Placing Trades
Get Free Access Now!
close-link
New Book: "How To Determine When A Reversal Is Going To Take Place"