If you’ve spent any length of time learning about pin bars you’ll know websites and books say the reason why pin bars are said to cause a reversal is because the wick shows a rejection taking place in the market. They say the rejection is a sign the traders do not want the price to rise or drop past a technical level such as support and resistance or a Fibonacci retracement.
What I’ll reveal to you today is why the wick does not actually show a rejection taking place and in fact is caused by a completely different process going on behind the scenes. Additionally I’ll also give some information as to why the size of the wick is important for revealing to us if the pin bar has a high chance of causing a reversal to take place.
A Rejection ?
The majority of price action books and websites state the wick on a pin bar shows a rejection taking place in the market.
It could be from a support or resistance level or any other technical level which can be identified on the charts.
The idea the wick is showing a rejection taking place is flawed because there isn’t actually any evidence to suggest technical level even exist in the market.
If we work from the idea that the wick does show a rejection taking place, it must mean traders in the market either brought or sold in large quantities upon the price hitting the technical level we’re seeing the rejection from. The question we need to ask ourselves is which group of traders placed trades upon the price hitting the technical level ? It can’t be retail traders because the vast majority will only trade in the direction the market is currently moving, therefore it must have been the banks buying or selling which has caused a rejection to take place.
This raises an important question…..
Why would the banks base a trading decision on a technical level ?
The reason I say this is because the only way for the banks to make some kind of trading decision is if there are enough orders currently available in the market, seeing the price hit a technical level means nothing unless there are sufficient orders there the banks can use to make some kind of decision.
If a bank wanted to buy at a support level they can’t just buy because they believe in the validity of support and resistance , they’ve got make sure there are enough sell orders coming into the market to even be able to place a buy trade. If there isn’t enough sell orders they can’t buy.
What The Wick Really Shows
So if the wick doesn’t show a rejection taking place what is it actually showing us ?
The answer can be one of four things….
Stop losses being hit.
Banks traders placing trades.
Bank traders taking profits.
Bank trades closing trades.
Anytime you see a wick on pin bar it means one of the things listed above has taken place. Knowing which one is the key to trading pin bars successfully.
The reason people assume the wick shows a rejection is because they’ll see a technical level going through the wick, therefore the level must be what’s causing the wick to form. It’s similar to how supply and demand traders believe old levels can cause the price to reverse. They see the price turn at a really old supply or demand level and think the reason why its reversed is because of the supply or demand zone when really the zone had nothing to do with the reversal and it was simply a coincidence that the point where the market turned was the same point where a supply or demand zone formed in the past.
The banks are the ones behind every reversal taking place, like I said at the end of the previous chapter, all of the banks decisions are based on how many buy/sell orders are coming into the market at the present time. They will not make trading decisions because of technical levels being hit, anyone who says they do does not know how the market works.
The Connection Between Trapped Traders And The Length Of The Wick
So now we know the wick on a pin bar does not show a rejection taking place what does it actually tell us about the market ?
To know why you need to understand how pin bars form.
Before a pin bar becomes a pin bar it’s actually a large range candle.
Large range candles are the types of candle which traders will use to jump into trading positions upon their appearance in the market. How big the large range candle is determines how many traders are likely to have entered trades in the direction to which the large range candle has formed.
The process behind a pin bar forming is simple….
The price makes a large move in one direction which sucks lots of traders into placing trades in the direction of the candle, the sudden increase in buy or sell orders means the banks are now able to complete a trading action such as taking profits or placing trades. When the banks make their decision, all of the orders which were coming into the market from the traders placing trades in the direction of the candle are consumed and the price moves in the opposite direction.
We see this on our charts as a bullish or bearish pin bar.
The traders who had placed trades in the direction of the large range candle will now have to decide whether to close their trades or not. Because the banks actions pushed the price in the opposite direction to which these traders had placed their trades it means their positions are currently at a loss, if the loss become great enough the traders will close their trades because they can’t handle losing any more money.
If enough traders close their trades it’ll cause the price to move in the direction of which the wick suggests.
The issue is it takes a lot of traders to be closing losing trades in order for this to happen, most of the pin bars you see and probably trade do not contain enough traders closing losing trades to push the price a large enough distance for us to make a decent profit, which means knowing how many traders there are likely to be closing losing trades is important if we want to take a pin bar trade and make a profit.
Knowing how many traders are likely to close their trades is easy !
All we need to do is look at how big the wick on the candle of a pin bar is. If it’s really big then it means there are probably lots of traders who will be closing losing trades and causing a big price change.
The problem is pin bars with a sufficiently sized wick are pretty rare to see and what other traders consider to be big is frequently not big enough to cause the price to reverse.
Check out this bullish pin bar on the 1 hour chart of USD/JPY
This bullish pin was created by a news event. When the news came out the price began to drop and to many retail traders it would have looked like the price was about to decline significantly. This meant a huge number of traders would have entered short trades and there will be a big mass of sell orders suddenly present in the market.
The banks decide to place buy trades due to the sizeable amount of sell orders coming into the market from people going short. Their buy trades are placed and the price moves up, turning the once heavily bearish candle into a bullish pin bar which has an extremely long wick.
Now all the traders who went short when the candle looked bearish will have seen their sell trades turn into losing positions and will be in the process of liquidating these losing trades, closing a sell trade puts a buy order into the market, lots of buy orders all coming into the market means the price will move higher.
In this image we have bearish pin bar on the 1 hour chart of AUD/USD.
The main difference between the bullish pin we have just looked at and the bearish pin above is the size of the wick.
On the bullish pin bar the wick was much bigger than the wick on the bearish pin seen above. This tells us a far smaller amount of traders placed trades when the bearish pin was forming compared to how many placed trades when the bullish pin bar seen in the previous image was forming.
Due to such a small number of traders placing trades on the pin above it means when the wick forms there is only a tiny percentage of traders who will be closing losing trades, because of this the price is only likely to fall a small distance as not many sell orders will come into the market when the traders who brought decide to close their losing trades.
I can’t give you a definite guideline as to how long the wick needs to be in order for it to be considered big, but I think your best bet would be to look for bullish and bearish pin bars which have a wick of a similar size to the bullish pin bar seen in the first image.
Although people don’t really like trading pin bars with large wicks because of the size of the stop-loss they must use, in the end they do have a higher chance of working out successfully than pins which only have small wicks. My advice to you is to only trade the pin bars which have the biggest wicks as these are the ones in which contain the largest amount of traders trapped in losing trades.
The wick is an important feature of pin bars but it is not the most important feature, lots of other factors come into play when trading pins and determining which pin bars have a higher probability of working out successfully than others. Pin bars with small wicks can be traded very successfully but only if you understand the reason why they have formed on the charts.
Without this understanding it will be incredibly difficult for you to generate consistent profits trading pin bars with small wicks.