Understanding How To Trade Institutional Pin Bars

In today’s article, we’re going to be looking at one of the two types of pin bar you can expect to see form in the forex market. The institutional pin bar is the type of pin bar that forms as a result of the bank traders coming into the market and placing trades to make the market reverse. These are the types of pin bar which most traders mistakenly assume they’re trading, due to the fact the vast majority of price action trading books and websites believe the reason why all pin bars form in the market is because of bank traders placing trades to make the market reverse.

This of course isn’t true, and as you’ll see in the article most of the pin bars which have been created by the bank traders placing trades do not form regularly on the chart and are much rarer than people are led to to believe.

Important Note:

This article has been extracted from my book “Pin Bars Uncovered”. If you would like to learn more about the concepts discussed inside Pin Bars Uncovered check the Cool Stuff page above.

 

The Two Types Of Institutional Pin Bar

Before I show you how to trade the institutional pin bars you see on your charts, I need to give you a little bit of background about the two different types of institutional pin bar you can expect to see form in the market.

image of institutional reversal pin barHere we have an image of an institutional reversal pin bar.

These pins will only form when the market is in the process of reversing and they will often be seen as one of the swing lows or highs that form as a result of the bank traders entering the market and placing some of their trades.

image of institutional continuation pin bars This image shows an example of three institutional continuation pin bars that formed during an up-swing on the 1 hour chart of AUD/USD.

Whereas reversal institutional pin bars will only form when the market is in the process of reversing, institutional continuation pin bars will only form after the reversal has took place and the market is in the process of moving higher or lower. Both of these images show the two types of institutional pin bar you will see form in the market. You may have picked up on the fact there are some clear differences between the reversal pin bar seen in the first image, and the continuation pin bars marked in the second image.

One of the most obvious differences, is the size of the reversal pin bar seen in the first image, is overall much larger than any of the continuation pin bars you can see in the second image.

The reason why the reversal pin is a lot bigger, is because the size of the buy trades the banks placed which caused this reversal pin to form, were much larger than the buy trades they placed to cause the continuation pins to form.

To understand why, you have to look at the market structure that formed previous to each type of respective pin bar appearing in the market.

image of institutional reversal pin barIf we go back to the reversal pin bar seen in the first image we can see it formed not long after a large move lower had taken place.

This big drop would’ve made the typical retail trader think the market is about to start a large move to the downside. When the price suddenly drops, the retail traders who saw the big preceding move lower as the beginning of a larger move down, jump into sell trades under the impression this move down is the beginning of the larger move lower they were expecting to take place due to the big drop which occurred on the 26th.

Needless to say all these traders jumping into sell trades puts a huge amount of sell orders into the market. The bank traders use these sell orders to get the last of their buy trades placed before the market reverses and what we end up with is large bullish institutional reversal pin bar.

We can confirm all of this to be true, because of the fact the reversal pin marked the last point where there was a substantial amount of sell orders coming into the market. After this pin had finished forming, the market reversed and the price began to move up with no other large drops taking place until the 7th

Now if we take a look at one of the continuation pin bars that formed during the swing up, and analyse it in terms of how many sell orders would have been coming into the market during the time it was forming, it’s clear there were a much smaller amount of sell orders entering the market when the continuation pin was forming than there was when the bullish institutional reversal pin in the previous image was forming.

This is because of the difference in market structure seen before each respective pin bar formed.

In the first image we saw how the reversal pin bar formed right after a large move down had taken place. This move lower would have caused traders to think the market is going to suffer a large drop in the near future. When they see the market make another drop lower, they assume it’s the beginning of the bigger drop lower they have been expecting to take place. When the banks enter their buy trades, the sell orders generated by the retail traders selling are consumed and the price moves up, resulting in the formation of a bullish institutional reversal pin bar.

In the second image, you can see the continuation pin bar forms after the market had already been moving higher. The fact the market had been moving higher, means that a much smaller number of traders will have been interested in going short when they saw the market fall during the creation of the continuation pin. This means the banks were not able to get many buy trades placed when the pin was forming as only a small number of sell orders were coming into the market from traders going short.

 

Summary

  • There are two types of institutional pin bar that form in the market. One is referred to as the institutional continuation pin bar, and the other is called the institutional reversal pin bar.
  • You will only see the institutional continuation pin bars form during up swings and down-swings. They will always be a signal the market is going to continue moving in the direction of the current swing.
  • The institutional reversal pin bar will only form when the market is in the process of reversing. Market reversals will always contain multiple swings up and down and typically, the reversal pin bar will end up being one of the swings seen before the reversal actually takes place.
  • The most obvious difference between institutional continuation pin bars and institutional reversal pin bars is their size. Reversal pins tend to be much bigger than continuation pins not only in terms of the size of the wick, but also in terms of the size of the candle bodies. This is due to the banks being able to get a much higher number of their trades placed during the creation of an institutional reversal pin than they are during the creation of a institutional continuation pin.

 

How To Trade Institutional Pin Bars

Now I’ve given you a little bit of background about the two types of institutional pin bar you can expect to see form in the market, I think it’s time I showed you how to go about trading each type of institutional pin.

What’s good to know before we start, is that both types of institutional pin bar are traded in exactly the same way as normal pin bars, i.e. once the pin has formed on the charts you enter the trade with a market order to either buy or sell. Now although nothing changes in terms of the way you enter institutional pin bar trades, the one thing which is different, is the position of your stop loss when trading each type of institutional pin.

Lets take a look at where you need to put your stop loss when trading institutional reversal pin bars.

Like I said in the previous chapter, reversal pin bars will only form when the market is in the process of reversing. This means they will always be found near other swings which are relatively close together in terms of the prices at which they have formed at.

image of institutional reversal pin barIn the image on the previous page, you can see how an institutional reversal pin bar was created right next to two swing lows which formed as a result of the bank traders coming into the market and placing buy trades to make the market reverse. It’s obvious from the image how close the low of the reversal pin bar is to the price at which the other two swing lows formed at.

Overall there is 13 pip difference between the low of the reversal pin bar and the lowest swing low that formed during the time this reversal was taking place. 13 pips is not considered to be a large distance when it comes to the banks getting multiple trades placed into the market. If the distance between the two swing lows was bigger, say like 40 – 50 pips, then it would be unlikely a reversal is taking place as the bank traders will not place their trades that far apart from one another.

What’s important for you to understand if you were planning to place a buy trade upon seeing this reversal pin form in the market, is you would need to make sure you place your stop loss below the lowest swing low that’s formed during the reversal and not below the low of the reversal pin bar itself.

If you put it below the low of the pin, the probability of having a losing trade increases, because if the banks have any more buy trades left to place, they’ll have to make the price drop in order to entice people to come into the market and place sell trades. Depending on how many sell orders they need to get their remaining buy trades placed, the banks might have to make the market fall below the low of the institutional reversal pin.

If this happens when you’ve got your stop below the low of the pin, you’ll end up losing money, not because you were wrong on the trade, but because you failed to take into account the fact the banks might still have trades left which they need to get placed.

Even though the banks may cause the market to fall below the low of the pin, they wont want it to fall below it by a large distance because they like to get all of their trades placed at prices that are as close together as possible. This means the drop will have to terminate somewhere near the lowest swing low because this is the lowest point where the banks have potentially got some of their buy trades placed during the reversal.

image of the market breaking through the low of a institutional reversal pin barThe image above shows an example of an institutional reversal pin bar that had its low broken due to the banks not having enough sell orders available to get all their buy trades placed into the market.

If you had placed a buy trade as soon as this bullish reversal pin bar had formed, with your stop-loss below the low of the pin like the trading books and websites teach you, you would have lost money on this trade because two days after the reversal pin appeared, the market came down and broke through the low of the pin before reversing and moving higher again.

The reason the market broke the low was because the bank traders did not have enough sell orders coming into the market to get the remainder of their buy trades placed. They needed to make the price fall further as that’s the only way they can get more traders to come into the market and place sell trades. When the low of the pin bar is broken, any sell stops traders may have placed at the low during the move up are triggered, this causes more sell orders to enter the market on-top of the sell orders that would have already been coming in from traders placing sell trades because they see the market falling.

Once the low is broken the bank traders get their remaining buy trades placed. All the sell coming into the market are consumed and the market reverses, causing many of the traders who placed sell trades during the move down to close their trades at a loss.

This is great example of why you need to think about where the banks have got their trades placed when you plan on trading any institutional reversal pins you see form in the market.

Despite the fact the reversal pin bar seen in the previous image had formed due to the bank traders placing buy trades to make the market reverse, the market still went on to break through the low of the pin because the banks didn’t have the necessary amount of sell orders coming into the market to get all their buy trades placed.

The books and websites would say that when the low of a bullish pin bar is broken, the pin bar has failed and the trade is over. They say this without understanding why the pin bar has formed or how the bank traders go about getting their trades placed into the market when causing reversals to take place.

When you see a bullish institutional reversal pin bar form in the market, you know not to automatically assume the pin bar has failed when the low of the pin ( or high of the pin if it was a bearish institutional reversal pin ) is broken, because it’s highly likely the reason it’s been broken is because the banks still have more trades left to place into the market.

So from now on when you see a bearish institutional reversal pin form, make sure you put your stop loss above the highest swing high that’s been created during the reversal and not the high of the pin bar itself. Conversely if your trading a bullish institutional reversal pin, be sure to put the stop below the lowest swing low you have seen form during the reversal, not the low of the pin bar itself.

Now that you understand how to trade institutional reversal pin bars, what I want to do next is move on and show you how to trade institutional continuation pin bars.

Institutional continuation pin bars are traded in much the same way as the reversal pins we have just looked at. To trade them successfully you must have an understanding of the points where the banks have got their trades placed into the market and a sense of how big these trades they’ve got placed are.

image of multiple institutional continuation pin barsThe image above shows an up-swing that took place on AUD/USD from the 28th September to the 12th October. You’ll notice I’ve marked 8 bullish pin bars that formed during this up-swing with arrows. All of these bullish pins are continuation pins that have formed because of the bank traders coming into the market and placing a small number of buy trades.

The key to trading continuation pin bars successfully is knowing where to put your stop loss when entering the trade. Unfortunately most traders when they trade pin bars will place their stop either above the high of the pin for bearish pins or below the low of the pin for bullish pins.

Whilst this is a perfectly valid place to put your stop, it can lead to numerous losing trades due to the fact that there will be many occasions where after the pin has formed, the market will come down and break through the low or high where you’ve got your stop placed before reversing back in the direction to which the pin suggested.The best way to stop this from happening is by placing your stop loss at a different point in the market, the question is where you do put it ? because you can’t just place it anywhere ?

image of two bearish institutional continuation pin barsHere’s an image of two bearish continuation pin bars that formed on the 15 minute chart of AUD/USD.

If you were planning to trade either one of these bearish pins you wouldn’t go and put your stop loss above the high of the pin, you would need to put it above the swing high I’ve marked with a tick inside the orange box.

The reason why is because the price action I’ve highlighted in the orange box, shows the most recent point where the banks came into the market and placed a significant number of sell trades. We know this to be true, because of the fact a large drop took place after the swing highs had formed. The only way this drop could have occurred, is if someone put sell orders into the market either from placing sell trades or from taking profits off buy trades placed earlier on in the move up. ( It doesn’t really matter which it is to be honest )

The three swing highs which you can see formed inside the orange box, were the main points where there would have been enough buy orders coming into the market for the banks to place a large number of their sell trades. This means the majority of the sell orders which caused the move down to take place, entered the market at these swing highs.

Now because the three swings are the main points where the banks placed their trades or took their profits, it means the stop-loss on your continuation pin bar trade has to be placed above these highs, more specifically, it has to be placed above the high I’ve marked with a tick, as this was the highest point the banks could have got their sell trades placed to cause the move down to occur.

If the banks wanted the market to keep on falling after their sell trades have been placed, they would come into the market and enter more sell trades, they wouldn’t let the price rise up past the point where they have got a large number of their sell trades placed, because they would still want the market to fall in order to make more money from their trades.

image of beaish institutional continuation pin bar on 1hour chart of eur/usdHere’s another image of a bearish continuation pin that formed in the market.

If you had traded this pin bar in the same way the books and websites teach you to trade pin bars, you would have probably ended up losing money on the trade, because a few hours after the bearish pin formed, the market moved back up and broke through the high of the pin before it reversed again and moved back in the direction the pin originally suggested.

Now if you had put your stop loss above the last point where the banks came into the market and placed a large number of their sell trades, you wouldn’t have lost any money on this trade, because although the market did end up breaking through the high of the pin, it was still quite far away from breaking past the highest swing high that formed as a result of the bank traders placing sell trades into the market ( Marked with a tick in the image )

The reason why the market tends to break through the high of bearish pin bars, or the low of bullish pin bars after they form in the market, is because when people see a pin bar form they enter trades in the direction to which the pin suggests, they then go and put their stop loss above the high or below the low of the pin ( depending on if the pin was bullish or bearish )

The more traders who do this when they see the pin form, the better it is for the bank traders, because they can just make the market spike up through the high of the pin to execute all the sell stops, that will allow them to get more of their own sell trades placed into the market at a more favorable price which gives them a better risk to reward ratio on their trade.

Sometimes you’ll be able to see the stops appear above the high or low of the pin using Oanda’s order graph, but in most cases the amount of stops that will be found above the high or low of the pin won’t be much compared to amount of stops you’ll see when trading typical stop runs, which you can learn how to spot using the “How To Trade Stop Runs Using Oanda’s Order-Book Article” on my site”.

Now when it comes to actually finding the most recent point where the banks have got their trades placed, all you need to do is look for source of the last drop ( or rise if the market was moving higher ) that’s taken place in the market.

image of bearish institutional continuation pin bar on 1hour chart of usd/jpyIn the image above you can see I’ve marked the source of a drop which occurred on the 1 hour chart of USD/JPY.

The area marked in orange is the source of the second big drop that took place before the bearish pin marked with an arrow formed in the market. If you were trading the bearish pin marked with an arrow, you would put your stop loss above the high I’ve marked with an X. Although this high was created by the market making a small drop, it’s still considered to be part of the source of the large drop, due to the fact it formed in close proximity to the high of the following drop ( marked with a tick )

When the highs are close together like this, it’s a sign the sell trades which caused the large drop out of the orange box were not only placed at the high I’ve marked with a tick, but also at the high next to it marked with an X.

So even though the high marked with a tick is the high of the large drop, it’s not the high at which you would put your stop loss, because of the fact the banks would have actually placed the majority of their sell trades which caused this drop to take place at the high marked with an X.

image of the source of the last drop that has took place in the marketHere’s an example of a situation where the source of the last drop was the high of a retracement rather than a consolidation structure like we have seen in the previous images.

When the source of the last drop or rise is a retracement, your stop loss will always be placed at the high of the retracement ( if it formed when the market was falling ) or the low of the retracement if the market was rising.

So if for example a bearish pin bar had formed at one of the points I’ve marked with arrows, your stop loss would need to go at the high of the retracement I’ve marked with an X. If there were multiple highs at the top of the retracement, your stop would be placed at the one which is the highest as this is the point where the banks would have got most of their sell trades placed.

Below is a basic summary of what you need to do upon seeing a continuation pin bar form in the market.

When you see a bullish or bearish continuation pin bar form, the first thing you need to do is find the most recent point where the banks got a large number of their trades placed. To figure out where this is, you just look for the point where the most recent drop or rise has originated from in the market. ( The point where the drop originated from will be seen as either a retracement or a consolidation )

If the most recent point where the banks got their trades placed was a consolidation, you’ll need to make sure you put your stop loss below the lowest swing low that formed during the consolidation if you were trading a bullish continuation pin bar. If you were trading a bearish continuation pin, you would put the stop above the highest swing high that formed during the consolidation.

If the most recent point where the banks entered the market was seen as a retracement, you’ll need to make sure to put the stop-loss below the swing low that marked the end of the retracement if you were trading a bullish continuation pin. Similarly, if you were trading a bearish continuation pin, you would need to put your stop above the swing high of the retracement.

 

Summary

I hope this article has given you a good idea of which pin bars you should be trading and where you should be trading them. If your still a little unsure about the process you go through to trade each type of institutional pin bar fear not, because in the last section of the book I run through some examples of how trade to each type of pin and how to determine which type of pin bar has formed in the market.

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

  • Institutional reversal pins will always form when the market is in the process of reversing. They are typically seen as one of the major swings that form during the reversal itself and you will always see other swings form around the same price as which the reversal pin has formed.
  • You will always see Institutional continuation pin bars form after a reversal has taken place. These pins are a lot smaller than reversal pins not only in terms of the size of their wick, but also the size of the candle body as-well. This is due to the fact the continuation pin has been created by the bank traders placing a much smaller number of their trades into the market than what they placed during the formation of an institutional reversal pin.
  • When you’re trading institutional reversal pins, make sure you do not put the stop loss at the low or high of the pin if there is a recent swing low ( or swing high for up-move to down-move reversals ) that’s formed during the reversal which is lower or highs than the low of the pin or high of the pin you’re trading. The lowest recent low or highest recent high needs to be included because the market has a high chance of reversing in the area between the high or low of the pin and the lowest swing low or highest high that’s formed during the reversal.
  • When your trading institutional continuation pin bars make sure you put the stop loss above or below the nearest point where the banks have got their trades placed into the market. This point will either be a consolidation or retracment seen before the most recent move down or up that’s taken place in the market.

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