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The Forex pin bar trading strategy is by far my favorite price action pattern. In this lesson we’re going to cover what makes a pin bar a pin bar, how to know if a pin bar is worth trading as well as entry and exit strategies. As always, the term ‘bar’ is interchangeable with ‘candlestick’, however the common term has always been pin bar, not pin candlestick.
The most common question I get when it comes to pin bars is how do I know when to trade one and how do I know when to stand aside. So in order to show this I’ve got a few examples set up. And the first pin bar I wanna take a look at is gonna be this bearish pin bar here. Now the first question you always wanna ask, whether it’s a pin bar or an inside bar or any strategy for that matter, is why am I trading this? What odds are in my favor? Because we all know that stacking the odds in your favor is really what it’s all about. That’s what makes you consistent.
So let me ask you, would you trade this pin bar? And you should be answering with well, I don’t know. I’d have to see what happened previously to know the answer to that. So let’s do that. If we zoom out here on the daily chart we can see that we’re clearly in an uptrend. We’re making higher highs followed by higher lows. So this bearish pin bar here I can already tell you would be no good because I don’t wanna get short in a market where we have this kind of upward momentum.
So if we move on to the next pin bar we come to this bullish pin bar here. And unlike the last one, this one is obviously with the trend. We also have our two moving averages that are providing dynamic support. The pin bar tail is also nice and long so that’s also good. But there’s one other factor here that really gives credence to why this is a good setup, and again we have to look back and previous price action. So if we draw our horizontal line we can see that this level acted as resistance previously. We then broke through this level on this bar, retested that level as support which held and price was rejected off of it forming a pin bar. This is exactly what we wanna look for.
So resistance broke through, rejected, forming a pin bar. We’re with the trend. We have our moving averages. It’s a well-formed pin bar so this would be a valid trade setup.
Now there’s two other pin bars on here that are even better trade setups and I’ll show you why. But first let’s identify those pin bars and those two are right here. Now these pin bars also, just like the last one, also have the momentum in their favor. We have the two moving averages. They’re also well-formed pin bars with nice long tails. But there’s one other factor here that really makes these two pin bars a great setup and that is this key level. And the reason I like this level better than the last one is simply because we have three touches.
So we touched this level three times. We broke through it on this bar. We then immediately formed a pin bar and this is exactly what we wanna look for. So let me just compare these two pin bars with the last one to drive this point home.
So the last one we had one touch off of this level, we broke through it and then formed the pin bar. So we had one touch on this level. Over here we had three touches, we broke through and then formed a pin bar. So any time you have three touches it’s gonna be a stronger level than just one touch. So although this was a valid trade setup you can see the price did retest this level once again before breaking through whereas up here as soon as we broke through this three touch level we took off for about 300 pips.
Before getting into the actual Forex pin bar trading strategy, we need to know the parts that make up a pin bar so we can easily identify them.
Let’s start with the “tail” of the pin bar, which is its defining characteristic and also sometimes called the “wick” or “shadow”. The tail of a pin bar should be at least 2/3 the length of the entire bar. The longer the better, but it must make up at least 2/3 of the bar from end to end. Notice in the image to the right, the tail is about 3/4 of the entire bar, so this qualifies.
The “body” of a pin bar is also important as it represents the open and close of the pin bar. The open and close should be close together; the closer the better. The body should also be close to the end of the pin bar. Notice how close the open and close are to the nose of the pin bar in the image.
Last but not least, the “nose” of the pin bar. While not as important as the tail or body, the nose is important only as it relates to the tail and body. This is because if the tail is at least 2/3 of the entire bar and the body is small, then the nose should also be relatively small. Also know that a pin bar doesn’t need a nose to be a pin bar. Sometimes it’s non-existent if the open or close occur at the extreme end of the pin bar.
Here’s a short video explanation of the characteristics of a pin bar. I also go into details about what makes this candlestick pattern such an effective price action strategy. Enjoy!
There are two main types of pin bars as it relates to price action patterns that are taught in my price action course. Most traders assume the pin bar is simply a reversal pattern, and it is, but there’s another way to trade pin bars that I’ll explain shortly. First, let’s look at the more common way to trade pin bars as a reversal pattern.
The reversal pin bar (above) is best played in a ranging market or on a pullback within a larger trend. Let’s look at both in action.
Below is a great example of a pin bar that formed after price broke through support and then retested it from the other side as resistance. This is actually a pattern that’s still taking shape as I type this.
Now for the other type of reversal pin bar, which can be found in a ranging market.
So far we’ve seen pin bars that form on pullbacks as part of a larger trend as well as pin bars that form in ranging markets. Now let’s look at the less common way to trade the pin bar, as a continuation pattern. The differentiating factor here is that a pin bar continuation pattern doesn’t have a pullback (or very little) relative to the examples above.
The key to this pattern is that the pin bar must form in the direction of a trending market. Notice the pin bar just in front of the pin bar that I’ve identified in the chart above, the one that’s facing the other direction. It too is technically a pin bar, however it’s going against the trend, so it would not make for a good trade. Here’s a zoomed out chart of the same setup to see what I mean…
I wanted to put this chart up for three reasons.
Confluence simply means, the coming together of two or more “things”. For Forex traders, confluence means the coming together of, or combination of, two or more price action patterns, levels or indicators. Let’s look at the setup below, which is the exact same setup we looked at before, only this time we’ll start identifying our “factors” of confluence.
Let me clarify what’s happening here by identifying the various factors at work. To make this as applicable as possible, I’ll go through each factor as if I were doing my own analysis.
So there you have it, a simple pre-trade analysis using confluence factors. It’s really that simple 🙂
I should point out that #4 above isn’t technically considered a confluence factor, but clearly identifying support and resistance levels is an extremely important part of any pre-trade analysis.
You’re probably wondering what the two moving averages are all about. Well, I use the 10 and 20 period EMAs in my trading. I find that they help to quickly identify the trend and also act as dynamic support and resistance. As a side note, you might find that I don’t use them on all the charts posted on this site, but that’s only because I don’t want to unnecessarily clutter the price action patterns.
You are probably on to it by now, but I want to point out why that reversal pin at the top of the GBPCAD chart above doesn’t fit our criteria. So here it is…
In other words, we didn’t have the necessary confluence to consider this a worthy pin bar to trade. The pin bar above has everything going against it except that it is a well-formed pin bar. The two most important reasons why I wouldn’t trade the reversal pin bar above are:
That about wraps up confluence. Think of these confluence factors as your pre-trade checklist, similar to a pilot’s pre-flight checklist, only ours is a LOT shorter…at least I hope.
Because there are a few different ways to get in and out of pin bars, and because this lesson is already pretty long, I decided to include pin bar entry and exit strategies in a separate lesson. But in order to get access to the link, you must answer the question below…okay, I’m only kidding, but I would appreciate it if you would take the time to comment below as I’m always interested to see what other traders are doing when it comes to pin bars. Thanks in advance!
Are you currently trading pin bars? If so, how do you trade them? If not, do you see yourself including them in the future? I look forward to seeing your comment below!
Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...
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