The Pin Bar Candlestick Reversal Pattern in my opinion is the single  most powerful candlestick reversal pattern there is! When identified correctly and traded the right way it will produce consistent profits time and time again. This individual single bar reversal pattern is enough to make a living off of when managed correctly.

In this post we will look at what is a Pin Bar, the difference between a great Pin Bar Reversal and an average reversal pattern. Where to look for Pin Bar reversal patterns, the correct way to trade Pin Bars, the best position to  place your stops and finally is there a good time to take a Pin Bar Trade.

What is a Pin Bar ?

A Pin Bar is a candlestick pattern where the body of the candlestick is very small and has a very long wick.  There are two types of Pin Bars a Bullish Pin Bar and a Bearish Pin Bar.

A Bullish Bar is represented by a small body at the top and a long wick below, this indicates that price was sold down by the bears and then immediately bought straight back up by the Bulls. In a perfect world the close is above the open for a bullish pattern and no wick at the top of the body. The opposite of this is true for a bearish pattern.

I stated that this was the case in a perfect world but if you limit yourself to this perfect pattern you will be missing out on an awful lot of good trades. This pattern comes in many forms and it is up to the discretion of the individual as to what identifies a tradable Pin Bar and a non-tradable one. Here are some examples of Pin Bars that I find are acceptable and will not hesitate to initiate a trade from.

This example shows all bullish Pin Bars, bearish reversal patterns are the exact opposite. note: for the sake of this article I will refer to bullish reversals patterns as blue in color and bearish reversal patterns as red in color.

What to look for in a Pin Bar

• I am looking for a small body to the bar, the smaller the better
• At a minimum I am looking for a wick that is three times the length of the body, but the longer the better. A Pin Bar with a wick that is ten times the length of the body has a much higher probability than one with much less.
• Location, location, location is just as true for a  Pin Bar Candlestick as it is for real estate. I will get into this later in the article but it is just as important as the reversal pattern itself.
• The wick must stick out from the surrounding price action

When It’s not a Pin Bar Reversal

• When it doesn’t meet the above criteria
• when it has a long wick protruding past the close or opposite the long wick, this then forms more of a spinning top style pattern and is far less reliable
• When it appears in a less than favorable location

Where to look for a Pin Bar Candlestick

• Previous major swing highs or swing lows
• Any major levels of Support and Resistance
• Pivot Points
• Trend Lines
• Round Numbers
• At Fibonacci levels
• Where there is strong confluence or a combination of many of the above points

Here are some examples of the Pin Bar in play

The way to trade the Pin Bar Reversal

In my opinion there is only one way to trade the Pin Bar Candlestick and that  is to always and I do stress ALWAYS wait for the bar to close. Once the bar is closed only then can you be certain that the Pin Bar has formed correctly. Once the bar has been identified it is just a matter of insuring it has formed in a high probability location, then quite simply open a position using your own risk parameters.

Stop placement when trading the Pin Bar Candlestick

Stop Loss placement is the simplest part of the whole equation. In my opinion there is only one place to put your stop when taking a Pin Bar play and that is at the extreme of the long wick, I generally place mine the distance of the spread plus five pips.

The reason for this is quite simple, it is quite common for price to re-test previous major levels. This just so happens to be where we are taking our trades and there is nothing worse then taking a position only to see it get stopped out and then see it go and hit your profit target.

Is there a good time to take a Pin Bar

There are times when these Pin Bar reversals can be a higher probability trade, this is really only relevant if you are trading the lower time frames, for example the 5min, 15min, 30 min and 1 hour time frames. These times are

• Frankfurt open
• London 0pen
• US open
• Sydney open

The reason for this is these are times when there a fresh new players coming into the market, if enough of these players have a different opinion than the current market the gross effect of this is they can turn the market on a dime.  It is this sort of market behavior that creates these Pin Bar Reversals.

Conclusion

The Pin Bar Candlestick reversal Pattern is one that not only happens to occur quite frequently, it is also one of the most powerful reversal patterns available to a forex trader. This pattern can be traded on any time frame and is best traded from major price action levels like previous support and resistance or pivot points and the like. The better the Pin Bar formation the higher the probability and the better the location the higher the probability. Only take the best Pin Bars in the best locations and the rewards will speak for themselves.

So Where to from Here

The Pin Bar is only part of the plan, what you now have is an excellent entry strategy for a forex trading system.  To complete this  system you still require a Pin Bar Money Management Strategy, a Pin Bar Trade Management Strategy and a Pin Bar Exit Strategy.

Once you have established  these criteria, there is one final thing to do Back Test! Back Test the system and confirm  that you have a profitable system.

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I just want to touch on the tools that I am using to trade the 15 min chart, this style of trading is based around support and resistance. The tools I am using are

1. Pivot Points
2. Horizontal support and resistance which is based on previous highs and lows
3. Candlestick patterns
4. Daily open

I am primarily watching how price reacts to the pivots and previous areas of support and resistance.  If i identify a rejection of a level by a reversal pattern or price momentum away from the area I will initiate a trade.  I simply use the next level of S and R or the next pivot point for my target.

This is a very simple trading method and is amazing just how effective it is. Over night saw some great examples of this style of trading and just how effective it can be.  Notice on the chart below how price moved between these areas.

click image for larger view

One of the great things about this type of trading is you don’t have to sit at the screen all day.  You can set up alerts from your platform to your phone that let you know when price is near any of these points.  I give it 20 pips before the Pivot Point as a rule, this gives me plenty of time to get to my screen and get a handle on the price action and prepare for a possible trade.

Perry

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Here is another chart pattern that appears quite regularly and can be quite an addition to any one’s trading arsenal.  What makes this pattern so appealing to me personally is the fact that it gives a very low risk entry point. It can preclude some huge market moves and with such a low risk the rewards can be huge if managed correctly.

An Inside Bar signals  falling volatility and market indecision. The current bar’s range is within the previous bar’s range.   Another way of saying the same thing – an inside bar has a low greater than the previous bar’s low and a high less than the previous bar’s high.  This market indecision can and does regularly supply the trader with the information that the market may be about to reverse.

This pattern can be traded on any time frame but as always the lower the time frame expect a lot more whipsaw. This pattern will complement any trading system or method.  It is another pattern that supplies the trader with both a low risk entry point and secondly supplies the trader with a logical place to put a stop.

As with all candlestick patterns this should not be traded in isolation.  When traded using a trend filter like a moving average this can be a extremely profitable pattern.  Another way to play this pattern could be with an oscillator and take breakouts when the oscillator is overbought or oversold.  Lets look at some examples of these two scenarios and where we would place our stops.

This next chart shows a great example of how to trade an inside bar using the stochastic oscillator to indicate when price is in the oversold zone to confirm the trade.  In this example you would simply trade the breakout to the upside of the Inside Bar Candlestick.  To do this you place a buy stop order a few pips above the high of the Inside bar.  There is two places that you can place your stop, the first and in my opinion the best place to put your stop is a few pips under the low of the Inside Bar.  The reason I say this is two fold, firstly it offers the lowest risk opportunity and secondly the best trades go your way straight away and don’t look back.  The advantage here is that when this happens you have your best position size on and there for the greatest profit potential.

The second place you could place your stop is below the low of the previous and larger candle.  This may appear to be the safer option but as stated previously the best breakout trades go your way straight away and all this stop does achieve is it gives you a larger stop and thus less position size on the trade.  This is an individual thing and you should trade what you feel most comfortable with.

click image for larger view

This next chart is a daily chart of the EUR/USD.  In this chart I have highlighted some Inside Bars that could have been taken as a trend trade.  In this scenario you would be looking to add positions as the trend continues and look for an Inside bar in a retracement with the assumption that this will signify a reversal in price and the resumption of the original trend.  This is an excellent trading style that allows you to build large positions in a good trend.

click image for larger view

Note how in the chart I have placed all the stops just below the low of the Inside Bar Reversal itself and all these stops have held there ground and were not stopped out.  In the above situation you would be able to put on relatively large positions due to the small stop sizes presented buy the Inside Bar setup.  As always money management plays a major role in all trading and is a subject all on its own.  If you have never looked at Inside Bars then maybe you should, check them out and see whether they could complement you’re current methods.

This is just one great reversal pattern, another is the Pin Bar. Read this post and add another great reversal pattern to your trading arsenal the Pin Bar.

Perry

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I am not going to go into to much depth about the history or design of the candlestick chart. Just Google candlestick charting and you will be inundated with information on this style of charting. Here is a link to a site I feel defines it quite well so feel free to peruse this page before reading the rest of this post. Candlestick Charts
Just on the subject of color, with today’s charting packages you can change the colors of the candles to anything that takes your fancy. I generally use red candles to define a bear candle (sellers are in charge) and blue, green or white to define a bull candle (buyers are in charge). I tend to change these colors regularly as it just changes the appeal of the chart. It can get a bit stale looking at the same colors all of the time.
I primarily look at candlesticks to identify reversals in price. Preferably I like to see price retrace against the trend and then form a reversal at a significant level. This I feel is an ideal place for me to enter a position because it identifies two things for me.

1. Firstly it identifies a turning point in the market
2. Secondly, as I am assuming this is a market turning point, then it also gives me an ideal place to place my stop loss order. I generally place it 10 to 15 pips below the lowest point of the reversal pattern.

I have two patterns that I use consistently that I have found to be reliable enough to use as additional indicators in my weight of evidence strategy. I say this because I don’t use any one indicator in a vacuum as such. What I look for in my trading is multiple key indicators to line up at the one time. These indicators then complement each other and reinforce my decision to take a trade. The two patterns I prefer are:

1. The first, I refer to as twin towers because this is what they look like to me. It is where one candle is the same size as the previous candle or completely engulfs the previous candle. What I am really looking for is a complete reversal of control. For example, a large bull candle indicates the bulls are in charge, but if this is then followed by an equally large bear candle, this signifies that the bulls have completely lost control and the bears are now in charge. Here are some examples on a chart to help identify these patterns.These are not complicated patterns and are very easy to identify. Just pull up any candlestick chart of any instrument. Pick a time frame and observe for yourself, just how reliable this pattern is and then form your own conclusions. For me it is a no brainer.
   

   click image for larger view

2. The second pattern has a lot of names, it can be called a pin bar, a lwc (long wicked candle), a shooting star, a hanging man and the list goes on. I like to call them pin bars because that is what they look like, A PIN. This is a single candlestick pattern whereas the twin towers is a multiple candlestick pattern. Both these patterns signify the same thing, the transfer of control from the bulls to the bears or vice versa. I use this pattern exactly the same way I use the twin tower pattern so I will insert a chart depicting this particular pattern.
   I prefer the wick of the candle to be at least three times the length of the body and negligible on the other side, candles 1 and 4 are great examples of this.
   These are the only two patterns that I regularly use in my trading. There are literally dozens of candlestick patterns and no doubt all very effective used in the right way. I try to keep my trading as simple as I can and thus limit myself to just the two of these patterns.
   Candles do play an important role in a lot of traders trading and therefore are definitely worthwhile further researching. Some books that are definitely worth a read are:
   1. Japanese Candlestick Charting Techniques, Second Edition
   2. The Candlestick Course
   3. The Secret of Candlestick Charting

   
   

Perry

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