This week’s question comes from several traders, who asked:
Why did last week’s USDJPY bearish pin bar fail?
Losing is never fun, especially when it comes to money.
However, it also happens to be the best teacher. Although we always strive to make a profit, chances are you will learn far more from a loss than you will from a win.
When you think about it like that, losses aren’t all bad. In fact, they can be incredibly useful if you keep an open mind and don’t shy away from the pain they cause.
Today I’m going to share a recent trade setup that went the wrong way. And by wrong way, I mean it turned out to be a loss for those who acted on it.
There were, in fact, three issues with the setup, each of which I will discuss below. By knowing what went wrong, you can be better prepared the next time you encounter a pin bar setup.
Read on to sharpen your pin bar trading skills.
On March 27 I posted a trade idea on the USDJPY. Following an intraday rally above the 105.50 key level, the pair closed the day back below it.
The selling pressure above 105.50 left us with a bearish pin bar.
Here’s how things looked at the time:
This setup had three things going for it.
The first was the trend. Since November of last year, the USDJPY has trended lower by nearly 1,000 pips.
By looking for opportunities to sell, we were using the bearish momentum to our advantage.
The second favorable attribute was the key level. The 105.50 area had served as a critical support area for more than a month before the market finally broke down.
As you may well know, old support becomes new resistance.
Last but not least was the shape of the pin bar. Sure, it wasn’t the most towering pin bar I’ve seen, but it did satisfy the requirements.
Here’s how things looked just 24 hours later:
The market didn’t just invalidate the setup, it annihilated it. This is an excellent example of why I always use a stop loss.
Okay, so you’ve seen the setup, now let’s discuss how we could have avoided the unpleasant situation altogether.
If you’ve studied my free pin bar course, you know that a rounded retest is ideal.
What is that, exactly?
Just as the name implies, a rounded retest occurs when a market breaks a key level and then slowly moves to retest it as new support or resistance.
Here’s a visual to illustrate how this differs from an immediate retest:
Notice the difference in the amount of space and time between these two hypothetical examples.
Let’s take another look at the USDJPY setup from last week.
See how there’s no space between the break and the retest?
This is not ideal. It suggests that there’s a decent amount of buying pressure near the lows, hence the immediate bounce to a higher level following the breakdown.
That isn’t to say that a setup without a rounded retest isn’t valid, but it does call for a more cautious approach.
Look no further than last week’s failed USDJPY pin bar.
This one could be debatable depending on your broker, but the day before, the pin bar appears to have formed a bullish engulfing pattern.
I did notice this at the time of last week’s commentary. However, the thinking at the time was that the bullish engulfing candle is what triggered Tuesday’s intraday rally.
In other words, I figured the downtrend and recent close below the 105.50 handle were enough to outweigh the bullish engulfing day.
Regardless of what I thought, having a bullish pattern directly in front of a bearish one is not conducive to a short position.
Be sure to keep this in mind the next time you’re scanning through your charts.
If you read last week’s USDJPY commentary, you may recall my comment about the relatively small size of the pin bar.
Here’s what I wrote:
Although the range of Tuesday’s move isn’t quite as extensive as I’d like, the pin bar shape, bearish momentum, and key level are all there.
The size of a candle or bar is a good indicator of how much buying or selling occurred during that period.
Of course, a thinly traded market can skew the results. This usually happens on a Friday or when a major player like the U.S. or U.K. are on holiday.
In general, though, a larger candle suggests a greater number of buyers or sellers depending on whether it was a bullish or bearish session.
When we’re scanning for pin bars, larger is usually better.
Larger than what? In this case, larger than the preceding candlesticks.
If we review last week’s USDJPY setup, you’ll notice that the pin bar wasn’t all that large relative to the previous candlestick.
That’s a bit of a problem. It’s why I made the comment I did last week about the pin bar’s range not being quite as extensive as I’d like.
The only benefit to a relatively small pin bar is a tighter stop loss. But that doesn’t do you any good if the setup fails.
So remember, larger pin bars are better all else being equal. The range of the pin bar should be comparable or greater than the size of the last few candles.
The somewhat ironic part about all of this is that those who placed a sell stop order below the pin bar’s low were never in this trade.
However, in this case it backfired.
Those who entered short at 50% had their stop loss hit not long after.
On the other hand, those who opted for the safer (yet less profitable) approach of waiting for a break below the pin bar’s nose were safe and sound.
That’s just the way it goes sometimes. Still, it’s an excellent example of one difference between these two entry methods.
I will continue to favor the 50% entry method for its more favorable risk-to-reward ratio. It remains the better option for my style and continues to come out ahead over a series of trades.
We’re in the business of trading probabilities. Even if you do your best to stack the odds in your favor, it doesn’t mean the market has to agree with you.
However, there are certain attributes we can look for to determine whether a setup is worth the risk.
The three attributes above are a great place to start. Does the fact that the USDJPY setup lacked these attributes make it a “bad” setup?
Not necessarily. I would, however, say that it makes it a “B+” setup rather than the “A+” setup we should be aiming for.
I mentioned some of these concerns in the member’s area shortly after the USDJPY pin bar formed. My suggestion in these cases is always the same—either cut your position size in half or ignore the setup altogether.
Again, there is no right or wrong answer here. One reason I love trading is that it’s all subjective. You could say that the attractiveness of a setup is in the eye of the beholder.
The key is to find a style of trading that works for you, something that fits your personality.
If you can do that, you can remove the sting from a loss. It’s no longer a painful experience, but rather a way to further refine your style and improve your bottom line performance.
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To do that, I need your help.
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