The appearance of a pin bar is supposed to signal a reversal in the market but as you have probably noticed on many occasions the price will not reverse and will continue moving in the direction of the trend. The traders who trade pin bars end getting frustrated with the pins not causing a reversal as this is what they have been taught should happen by various trading books and websites.
If your one of these traders who is fed up with trading pin bars which end up failing then I think today’s article may help you out because not only am I going to explain why so many pin bars fail to cause a reversal, I’m going to give you a simple rule to follow which will help you trade pin bars far more effectively.
Table Of Contents
What Type Of Pin Bar Is It ?
If you didn’t already know there are different types of pin bars which appear in the market. When I say types I don’t mean one pin bar has a bigger wick than the other, I mean the causes behind why a pin bar forms in the market can be different depending on where the pin bar is found.
Traders are taught all pin bars are reversal candlesticks, they say when you see a pin bar form the market is likely to change direction. What the teaches don’t tell you is the only time a pin bar will cause a reversal is when the banks take a significant amount of profits off their existing trades or when they’re placing trades in order to make the market reverse.
Both of these actions are quite rare to see in the market, whilst bank traders do take profits very frequently, its uncommon for them to take the amount profit needed to cause a price reversal, even more uncommon is bank traders placing trades in order to cause a reversal.
Most reversals happen in stages due to the way the banks wont be able to get their entire trading position placing into the market in one go, this means seeing a pin bar form because of banks placing trades to cause a reversal is actually a very rare event.
It’s likely most of the pin bars you’ve traded have been caused by profit taking, not by banks buying or selling which is what most price action books/websites assume is the cause behind all pin bars forming in the market.
When You Should Trade Pin Bar As Reversals
I want to make clear that I’m not saying pin bars should not be traded as reversal signals, what I’m saying is you need to trade pin bars after you have already seen signs of reversal taking place.
If you try to trade pin bars as reversal signals when the price is moving in the direction of the trend, then you run the risk of accidentally placing a trade on a profit taking pin bar instead of a reversal pin bar. This wouldn’t be a problem if it were not for the fact you cannot determine if a pin bar has been created by profit taking until after the pin itself has formed.
The image above shows three bearish pin bars which formed when the price was advancing higher.
Common pin bar teachings would say these three bearish pins are valid for placing short trades but as you can see none of them ended up working out profitably. Why they didn’t work is down to the reason they formed in the first place, these pin bars were created by bank traders taking profits off buy positions, not by banks placing sell trades to cause a reversal.
When each one of pins above appeared, you wouldn’t know if they were caused by profit taking or by bank traders selling, if you had placed a sell trade when any of the bearish pin bars above formed, it’s highly likely you would have lost money. It may have been possible to make tiny amount of profit on two of the pins, but overall unless you were very quick on reacting to changes in the market there’s a high chance you will have lost money trying to trade these pins.
Here’s an example of a bearish pin bar which formed AFTER the trend had already changed.
It’s far safer to trade this pin bar than it is to trade the pins found in the previous image as we have evidence of the price wanting to move lower. In the previous image we had no sings that a reversal was about to take place, in the image above the price has already dropped and broken two previous swing lows, if the price has already fallen then it means someone must be interested in selling.
It may be the selling is caused by banks taking a large amount of profit off existing buy positions, if that’s the case there is still a high chance the bearish pin bar will work out profitably because the banks may want to take additional profits off their buy trades.
I think one of the most useful things you can do if you want to have more success trading pin bars is trade in the direction of the most recent high or low.
This is something which I use when I’m looking to take supply and demand zone trades but it’s just as applicable to trading pin bars because it will always mean your trading in the direction of the current momentum.
People who trade pin bars rarely trade them in the direction of the most recent high/low because they have been taught pin bars are supposed to cause a reversal, for example when price action traders see the price moving higher they’ll place sell trades whenever they see a bearish pin bar but neglect to place a buy trade when the see a bullish pin bar.
The traders see the bearish pin bar as a sign the whole up-move is about to reverse when really its just banks taking profits off buy trades, if they stopped trying to predict when the entire up-move is going to end and instead focused on placing trades in the direction of the up-move itself they would be far more profitable trading pin bars.
If you look at the image of the three bearish pin bars you’ll notice they all formed AFTER the price had already made a new higher high. A new high suggests there will be further up-movement, therefore placing a sell trade after the market has already given us a signal that it wants to move higher isn’t exactly the best way to put the probabilities in you favor.
The Banks Use Pin Bars Against You
Because very few people realize there are different types of pin bars which can form in the market, it means the common advice you get given when learning about why pin bars form are actually a hindrance to you and beneficial to the banks because it helps them make money.
For the banks to take profits off a trade they have placed they need lots of orders to come into the market in the same direction to which they have placed their trade. If the banks wanted to take profits off a sell trade, they would need other traders to sell, if no other trades sold there wouldn’t be anyway for them to take profits, because taking profits off a sell trades means you need to buy back what you sold at a lower price.
The point where lots of traders will place trades in the same direction is when a large range candle begins to form, when traders who are watching the market see a big candle, they place trades in the direction of the candle as it gives them the impression that the price is about rise or drop considerably.
When enough of these traders have piled into the market the banks use their orders to take profits off their own existing trading positions, the price begins moving in the other direction because the traders orders have been consumed and what you eventually end up with is a bullish or bearish pin bar.
Price action traders see the pin bar as a reversal signal and start placing their trades expecting the price to move a large distance in the opposite direction, they don’t know the pin has been created by profit taking because they mistakenly assume all pin bars appear for the same reasons.
The orders which come into the market from the price action traders trading the pin bar allow the bank traders to get more trades placed in the direction of the current trend.
Essentially the bank traders haven’t deliberately made a pin bar form in order to make traders lose, it’s the price action traders lack of knowledge on why pin bars form which causes them to make the wrong decision. If they knew there were different causes behind why pin bars appear then they wouldn’t be tying to trade pin bars which form against the trend.
If you want to trade pin bars more profitably then I suggest you begin thinking about the reasons why pin bars form in the market, when you see a pin appear on your charts, look at the previous price action and ask yourself “where have the banks placed their trades ?” then think about what they need in order to be able to take profits off these trades they have placed.
By doing this you should be able to determine what decision has caused the pin bar to form in the market, if it’s a profit taking pin you know it has a low chance of causing a reversal, therefore you know taking the trade is likely to result in you losing money.
The lack of information surrounding pin bars and other candlestick patterns makes it very difficult for traders to trade them effectively, a lot of the advice which is already out there does not give traders the right understanding they need in order for them to take high probability pin bar trades, if a larger number of traders waited until they have seen signs of the market reversing before taking a pin bar trade then they would be far more successful trading pins, because they have confirmation that the market wants to move in the other direction.
If traders try to trade pin bars which form against the trend such as when the market makes a higher high or lower low then they are asking for trouble because they are attempting to trade against the current momentum.
My final words are this, always trade in the direction of the most recent high or low, do not trade pin bars which form when the price makes a new high or low, these are low odds trades and more often than will cause you to lose money if you decide to trade them.