Pin Bar Trading Strategy

Pin Bar Trading Strategy

A Pin Bar is an extremely simple yet powerful pattern to implement into a trading strategy.

They are used by are price action traders to determine potential reversals in the market.  Pin bars can be very high Reward to Risk setups when traded properly.

Let’s dig into the characteristics of a pin bar and discuss a few pin bar trading strategies.

What Is A Pin Bar?

A pin bar is a single candle stick with a long tail (also called wick or shadow) and a small body. You can find pin bars using a bar chart or candle stick chart on any time frame in any market including Forex, Stocks, Futures, and Options. Most price action traders prefer the use of candle stick charts over bar charts as they are easier to interpret extremely fast when having to make split second decisions day trading.

Characteristics of a Pin Bar

Pin Bar Characterisitcs

  • A pin bar is most recognizable by it’s tail. A valid pin will have a tail whose length is two thirds or more of the entire candle.
  • The “body” or “real body” of a pin bar is the area between the open and close of the candle. The open and closing price should be very close together or equal (same price).
  • Bullish pin bars are best when the close of the candle is higher than the open.
  • Bearish pin bars are best when the close of the candle is lower than the open.
  • The tail of a pin bar should exceed (or stick out past) surrounding price action.

Pin Bars In Action

Below is a 1 minute chart of Facebook, we can see numerous pin bar formations that would have resulted in profitable trades. Notice how all the pin bars extend below the previous price action confirming a rejection of lower prices. Do you notice what all of these pin bars have in common?

introduction-to-pin-bars

If you guessed that they are all Bullish Pin Bar Setups you’re right! Can you spot some of the bearish pin bar setups on the chart?

Pin Bar Theory

It’s always beneficial to break down the market into it’s simplest components to help paint a picture in your mind to determine what the overall crowd of traders who make up the market are thinking. Consider the following…

Understanding A Pin Bar

Imagine yourself above entering a maze. You have only two options, to go left or right. You begin by going left and after a period of time you start to question if you went the right way. Eventually you decide to turn around heading back to your starting point.

When you reach your starting point you once again have two options, go back the way you just came or journey on in the new direction. Some people will second guess their decision and head back the way they just came from to go a little further and see if it’s the right direction. However, a majority  people will continue on in the new direction.

Pin Bar Theory

If we flip the maze vertical and place a pin bar along our path it paints a picture of where we had been and where we currently are. The open and close of the pin are both near your starting point. The tail of the pin bar shows the path you traveled and where you decided to turn around to head back to the starting point.

Most people would look at this and expect price to continue to move up and more times than not it will.

Types of Pin Bars

There are number of different pin bar formations you can trade. I personally generalize them all as pin bars but for those of you perfectionist here is a breakdown of the different types of pin bars.

Hammer Pin Bar

Hammer

The Hammer  is bullish reversal pattern that forms at the end of a decline in price (downtrend). Sellers held control during the beginning of the session of the candle but by the end buyers had stepped in and driven price back above the open of the candle. The end result is a candle with a long lower tail or wick which will exceed below the most recent price action. Hammers have the highest probably of success when the open is higher than the closing price.

Shooting Star

Shooting Star

A Shooting Star is bearish reversal pattern that forms at the end of an advance in price (uptrend). Buyers maintained control during the beginning of the session but by the end sellers took over and drove price back down below the open of the candle. The resulting candlestick will have a long upper tail or wick which should extend out above recent price action. Shooting stars have the highest probability of success when when the closing price is below the opening price of the candle.

Inverted Hammer

Inverted Hammer

The Inverted Hammer looks exactly like a shooting star but forms after a downtrend in price. The long upper tail signals a potential reversal as buyers began coming back into the market they gave back ground to the sellers before the candle closed. Because of the failure to close out the session of the candle strong you should always look for bullish confirmation prior to entering a position.

Hanging Man

Hanging Man

The Hanging Man looks exactly like a hammer but forms at the end of an uptrend in price. The long lower tail signals that sellers controlled the open of the candle prior to buyers stepping in and pushing price backup. Similar to the inverted hammer, you need further confirmation due to the failure of the candle to close out the session weak.

Dragonfly Doji

Dragonfly Doji

A Dragonfly Doji is similar to a hammer but with a dragonfly the open, high, and close are all equal. The candle forms the shape of a “T’ signaling that sellers controlled the beginning of the session before buyers stepped in and pushed price back up to the opening price. The reversal implications of a dragonfly depend on previous price action.

Gravestone Doji

Gravestone Doji

A Gravestone Doji forms when a candle has a long upper tail and the open, close, and low are all equal. Similar to a dragonfly doji the candle forms a “T” but it is inverted.

Pin Bars alone are not trading strategies and the reversal implications of any pin bar depends on prior price action. You should always look for additional confirmations prior to taking a pin bar trading setup.

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Pin Bar Trading Setups

Pin Bars At Key Support & Resistance Levels

On the chart below you can see a key support level had formed on the E-Mini S&P 500 Futures. Price action failed to break below the key support level and on its third attempt a bullish pin bar formed. On the third attempt to break the support level the pin did break through momentarily, but buyers came in and pushed price back up closing the session out at it’s high. This gives you a high probability setup as a number of sellers are now caught selling at the lows which will most likely help add to the bullish.

Pin Bar At Support Level

You can use all different types of support and resistance levels where pin bars form including:

  • Moving Averages
  • Trend Lines
  • Double Tops and Double Bottoms
  • Fibonacci Retracements

Pin Bars In Trend

The below 1-minute chart of Facebook reveals a strong downtrend with price being rejected at the red trend line multiple times. You will notice three separate instances where pin bars formed right at the trendline further rejecting an upward move. You could have been profitable entering a trade on any of these pin bars. Always remember, The Trend Is Your Friend 🙂

Pin Bars In Trend

Pin Bar Entry & Stop Loss

Pin pointing when to enter a trade and where to place your stop loss is just as important as the trade setup itself. Pin bar setups give you some very logical places to enter and exit a trade.

Pin Bar Entry And Stop Loss

Breakout Strategy  – Enter on breakout above the high of bullish pin bar or the low of a bearish pin bar with a stop loss below the low (bullish pin bar) or above the high (bearish pin bar).

When using the breakout strategy you can use a market order but I suggest a stop order as price action can be extremely fast after the formation of a pin bar. A stop order will help ensure you don’t miss out on your entry.

Placing your stop below the low of a bullish pin bar and above the high of a bearish pin bar logically makes sense. Remember you are looking for pin bar setups where the tail extended beyond prior price action. Therefore placing your stop beyond the tail of the pin bar means that price would have to make new lows or highs depending on the direction of your position to be stopped out.

Pin Bar Retracement Entry

Retracement Strategy – Entry at 50% retracement of pin bar with stop loss below the low (bullish pin bar) or above the high (bearish pin bar).

When using retracement strategy you will miss out on some moves but your risk to reward becomes much greater as you are now only risking half when compared to the breakout strategy.

You measure the 50% retracement of the pin bar and place a limit order to buy for long setups and a limit order to sell for short setups.

Your stop loss would be placed in the same way as the breakout strategy.

Mistakes Made When Trading Pin Bars

The number one mistake traders make when trading pin bars is taking setups where the tail does not exceed previous price action.

Failed Pin bar Setup

The pin bars highlighted in the chart above would be an example of an invalid signal. Remember, we’re looking for a reversal in the market and the exhaustion of a move. This setup doesn’t occur at the end of a down move nor does the tail extend out past previous price action.

The second mistake traders make is simply trading a pin bar without any further confirmation.

Failed Pin Bar Setup 2

In the chart above we see a nice bearish pin bar form during an uptrend signaling a potential reversal. However, we don’t have any additional confirmation such as the rejection of a resistance level.

Failed Pin bar Setup 3

Jumping forward we can see that trading this pin bar would have resulted in a quick loss. Remember to always have additional confirmation!

The final mistake most traders make when trading pin bars is taking trades prior to determining their stop loss and take profit. You need to do this prior to entering a trade while you still have complete objectivity! Once in a trade you tend to lose your objectivity which leads to unnecessary mistakes and losses.

Pin Bar Trading Tips

  • Pin bars often signal major reversals in a market. You can use pin bars not only as trade setup but you can implement them into your current strategy as another confirmation for taking a trade.
  • Not all pin bars are created equal. Pin bars with longer tails tend to be higher probability setups. They also tend to see more of a retrace before the trade actually develops making them a better candidate for the retracement entry strategy discussed earlier.
  • Remember to always calculate your Reward to Risk prior to entering a trade. I aim for pin bar setups with a minimum of a 3:1 Reward to Risk ratio.
  • Pin bars are effective reversal signals in any market including Forex, Stocks, Futures, and Options. Make sure to spend time back testing and trading pin bars on a simulated account prior to live trading.

So there you have it! That is a quick dive into how I use pin bars with my own trading strategies. Thanks for reading, and I really hope you enjoyed it. Start testing trading pin bar setups and let me know how it goes!

(NOTE: Want to learn exactly how I use Pin Bars to trade? Become a JT Member for Free. Click Here.

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Adam
Adam is the founder of Jumpstart Trading. He began is professional trading career in 2003 at GPC which was the second largest proprietary trading firm in the United States. Since then, he has achieved a top 10 performance at a prestigious national trading firm, developed multiple trading strategies and complex trading algorithms, and trained thousands of traders in person and online. He specializes in Index Futures, Oil Futures, U.S. Stocks, and Forex.
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