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If you’ve just come from the lesson Forex Pin Bar Trading Strategy, welcome! If not, I strongly urge you to read that lesson and then come right back. It will help set the foundation for what we’re about to cover.
Before we get into all the juicy details about pin bar entry and exit strategies, we need to discuss a very important subject, the Risk reward ratio. Please do not skip ahead because the pin bar entry and exit strategies we’re going to cover in this lesson won’t make much sense without understanding risk reward ratio. Not only that, but the proper risk reward ratio is critical if you want to succeed as a Forex trader. I truly believe that this is the missing link for many traders who are struggling.
So what is a “risk reward ratio”? A risk reward ratio is simply the amount of capital risked to achieve a desired gain. Because it’s a ratio we represent it as follows:
1:2 (in this case the “1” is our risk and the “2” is our reward) An example would be risking $50 for a potential gain of $100. Let’s look at another way to represent the risk reward ratio.
Don’t worry, it isn’t as scary as it sounds. The R-multiple is simply the ratio converted to a multiple. So in the case of our example above, the 1:2 ratio becomes 2R. Let’s covert a few more before moving on.
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1:3 becomes 3R
1:2.5 becomes 2.5R
1:3.52487 becomes 3.52487R …I couldn’t help myself 😉
We’re essentially just placing an “R” after the second number (reward) in the risk reward ratio. Because the risk is always represented as the number one, the reward will always be divisible by itself. It’s just an easier way to represent the risk reward ratio.
Not so scary anymore, is it?
The reason I mentioned that the proper risk reward ratio, or R-multiple as we now know it, is critical to your success is because it allows you to have more losers than winners and still come out ahead. How is that possible? By maintaining a 2R minimum per trade, which is how I trade and what I teach in my Forex trading course. If you maintained a 2R average, you could actually lose 65% of your trades and still come out ahead.
Now that we understand R-multiples and the benefit of maintaining a 2R minimum, let’s get into pin bar entry strategies. The rest of this lesson will assume that we have already gone through our confluence checklist and are now ready to place the trade.
There are two common ways to enter a pin bar trade. Both have merit and really depend on the trader as well as the market conditions.
It isn’t as brutal as it sounds 😉 The break of pin bar nose entry is the more common and conservative way to enter a pin bar trade. The entry strategy is exactly how it sounds.
Entering on a break of the pin bar nose involves placing a stop order just beyond the nose of the pin bar. In the example above, we would place a sell stop just below the pin bar nose. The distance at which you place the order is really personal preference and depends on the currency pair traded, but a good rule of thumb is 5-10 pips. This allows for some room in case of a false break.
This is my favorite way to enter a pin bar trade. It’s my favorite because it allows for a much better entry, thus increasing the potential R-multiple considerably. This means that on a potential 2R trade using the break of pin bar nose method, you can now get a potential 3R or better using the 50% entry method on the exact same trade setup. If used properly, the 50% of pin bar entry can have a drastic effect on your account balance over time.
To get our pin bar entry level using the 50% rule, we simply drag the Fibonacci Retracement tool from the top of the pin bar tail to the bottom of the pin bar nose. Of course if this were a bullish pin bar we would drag the Fibonacci Retracement from the bottom of the tail to the top of the nose. Over time you’ll become so comfortable with this pin bar entry strategy, that you won’t need to use the Fibonacci Retracement. Until then it’s good practice to draw it out as it will help keep you disciplined.
Although the 50% entry can provide better returns, it’s not without flaw. About half the time (even less on some currency pairs) the market won’t retrace 50% of the pin bar, leaving your buy or sell limit order unfilled. This means that if you find an exceptional pin bar setup and decide to use the 50% pin bar strategy, there’s a chance your order may not get filled and you’ll be left behind. There’s nothing worse than waking up in the morning to see the market has run 200 pips in the desired direction but missed your limit order by 5 pips. But it’s a chance that many, including myself, are willing to take in order to squeeze out a higher R-multiple.
This is where we bring it all together. The reason I titled this section exit “plans” and not exit “strategies” is because I want it to be clear that you must have an exit plan before entering a pin bar trade, or any trade for that matter. The saying, “plan your trade and trade your plan” could not be more true for those who have found success in the Forex market.
There are two types of pin bar exit plans. This may seem a bit obvious but I’m going to list them anyway.
Easy enough, right? 😉 You may be wondering why I listed exiting for a loss first. It’s no secret that our minds naturally gravitate toward thinking about profits first, and the possibility of losing second. But in order to become a successful Forex trader, you need to play defense 100% of the time, and that means putting the potential for loss first. Always, always, always identify your exit plan for a loss first, and then identify your profit target. It will take some time to adjust to this way of thinking, heck I even catch myself thinking about profits first from time to time. But I promise that this one small change will make a HUGE improvement in your trading as it will force you to think defensively, making you a more diligent and disciplined trader in the process.
Okay, now that I’m off my soapbox (it happens from time to time) let’s move on.
So how do we plan for a potential loss on a pin bar setup? By always making sure we have a stop loss order in place. The best place to set your stop loss on a pin bar trade is above or below the pin bar tail. This is true regardless of the entry strategy you utilize.
For a bullish pin bar setup we would place the stop loss just below the pin bar tail. The distance at which you place the stop loss depends on your comfort level as well as the currency pair being traded, but a good rule of thumb is 5-10 pips from the end of the pin bar tail.
Now for the really fun part, setting the take profit order for our pin bar trade. This can be a little harder to explain, but I’m going to try and make it as straight forward as possible.
The first thing you want to do is to identify the support and resistance levels on the chart. In reality this would be the very first step, even before identifying a potential pin bar setup. This is because in order to know if a pin bar setup is valid you would need to know if it has confluence, and would have already drawn your levels on the chart. While this is true, I always look for additional levels on a chart once I’ve spotted a potential pin bar setup. I do this to make sure I didn’t miss any key levels that may effect the validity of the pin bar setup.
Using the same pin bar setup as before, the first level of support looks like it would come in around the .8987 level, so this would be a safe place to take profit. In hindsight the market did drop further, but it’s always a good idea to set your take profit at the first area or support or resistance. Once you get really good at the pin bar strategy, it’s possible to let some trades run further by watching how price reacts to a level, but for now just focus on taking profits at the first level.
Now that we understand how to enter a pin bar setup and how to exit one, I have a test for you. What if we used the break of pin bar nose entry for the pin bar setup above…anything wrong with that? I’ll give you some time to analyze it…
Okay, I’ll give you a hint, it begins with “R” and ends with “multiple”, oh and there’s a “-” in between. 😉 If you knew that, great job! Because our first level of support (profit target) is so close to the pin bar setup, an entry on the break of the pin bar nose would violate our 2R minimum we set previously. What to do?…if you said use the 50% entry method, you are spot on, good job!
Here’s what the two strategies would look like in action…
Hopefully the illustration above doesn’t look like something out of John Madden’s playbook. But in case it does, let me break it down.
Using the break of pin bar nose entry strategy, we get a stop loss of 80 pips and a potential profit of 90 pips. As mentioned previously, this violates our 2R minimum as our profit target would need to be at least 160 pips away, so there’s no trade using this type of entry. Using the 50% entry strategy, we end up with a 40 pip stop loss and a potential profit of 130 pips! See the power of the 50% pin bar strategy?
As an R-multiple, the break of pin bar nose entry becomes a 1.1R, while using the 50% entry becomes a 3.25R. If risking $100, that’s about a $110 profit using the break of pin bar nose entry strategy and approximately a $325 profit risking the same $100. That’s why I prefer the 50% pin bar entry; it’s powerful!
So there you have it, our two pin bar entry strategies and our two pin bar exit strategies. Here are some important points to take away from this lesson:
What are your thoughts on the pin bar entry and exit strategies discussed here? Feel free to ask a specific question or just leave a general comment…all are welcome! I look forward to seeing yours 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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