AtoZ Markets – Price action is a method of predicting the price of a currency pair based on the movement of price. Price action is a powerful tool for technical analysis that is used by most of the professional traders. The main difference in price action trading with other trading methods is that it ignores the amounts of indicators from the charts.
As we know, indicators are very laggy, which indicates the price when the movement already happens. Therefore, traders use price actions to predict the market with the highest accuracy. However, there are no fixed rules of price action trading that a trader can follow. Moreover, there are many price action trading strategies available, and the pin bar trading strategy is just one of them.
What is a Pin bar?
A pin bar is a short form of 'Pinocchio Bar,' which is a single candlestick that has a long tail and a small body. You can see this price bar in a bar chart or candlestick chart on any time frame or in any financial market, including Forex, Stocks, Futures, and Options. Most of the price action traders use this candlestick as they find it easier to interpret extremely fast when making their trading decisions.
There are some characteristics of the pin bars that make it unique and high probable.
- A pin bar is recognisable by its tail. A pinbar will be valid if it has a tail whose length is two thirds or more than the body of the candle.
- The “body” of a pin bar is the area between the open and close of the price. In a pinbar, the open and closing price remain close together or equal.
- Bullish pin bars are best when the closing price of the candle is higher than the opening price.
- Bearish pin bars are best when the closing price of the candle is lower than the opening price.
- The tail or wick of a pin bar should exceed the surrounding price action.
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What Is Theory Behind The Pin Bar?
It’s always useful to split the market into its simplest components. It will help to paint a picture in your mind about what the overall crowd of traders is thinking.
The pinbar indicates what buyers and sellers are doing in the market. Imagine, at the opening of the day buyers took the price up to and reached a moderately high level until the middle of the day. That means from the beginning of the day; the market is under buyers’ territory. However, after the middle of the day sellers came and started to drag the price down. Therefore, at the end of the day sellers were able to move the price below the opening levels and formed a bearish pinbar
This is what happens inside the pinbar. When we see a pinbar, we should consider that there is a story behind it. The concept of the story is that one party will dominate the price and after a moment they will be covered by the opposite party. Therefore, most of the people would look at this and expect the price to continue towards the 2nd party.
How to Trade or Use the Pin bar Strategy?
Pin bar trading strategy is very famous and one of the most effective way of trading in the forex market. Therefore, many professional and institutional traders use it to take potential price reversal trades. You can use a pin bar in position trading, swing trading as well as in intraday scalping.
Pin Bars At Key Support & Resistance Levels
Key support and resistance levels are the potential horizontal levels that occur in mainly daily or weekly time frame. When price approaches these levels, it becomes highly probable that the price will reverse. However, it is important to know what traders are doing at that level before jumping to the trade from key levels. Therefore, the pinbar becomes important as it indicates what traders are doing on key levels.
On the chart above, you can see a key resistance level on a forex chart. Price action failed to break above the key resistance level and formed a bearish pinbar. That means, on that day, sellers came and took control over the price by creating the daily close below the daily opening price. As a result, the price started to move down.
You can follow these simple steps to take entries from key support and resistance levels using the pin bar:
- Identify the key support and resistance levels.
- Wait for the price to reach that levels and form a bullish or bearish pinbar.
- Make sure that the pin bar is valid and from key levels.
- Enter the trade after closing the pin bar with the stop loss above or below the wick of the pin bar with some buffer.
- Use the next key support or resistance levels as your target.
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Trend Trading with Pin bars
As we know, traders use the Pin bar trading strategy as a reversal price action, but you can use it towards the trend. In any financial market, the price moves with some zigzag formation. It is not like the price will move 1000 to 2000 pips straight from one side to another side. The characteristic of the forex market is that the price will proceed with an impulsive pressure, and then it will halt for a moment with some correction. Therefore, you have to identify the correction of a significant trend and to use the pin bar as a reversal of the correction and continuation of the major trend. Make sure to follow this techniques step by step:
- Identify the major trend that has an impulsive pressure.
- Find the correction of the primary trend.
- Wait for the pin bar to form from the correction at near term support or resistance levels.
- Take the trade after closing the pin bar and put your stop loss above or below the wick with some buffer.
- In that case, your take profit will be based on the next important levels.
Intraday Trading with Pin bar
You can trade with pin bar if you are an intraday trader or day trader. In that case, you need to understand the market context deeply to know the current market direction. Therefore, you can take entries from near term support or resistance levels or dynamic levels towards the trend based on the market context.
In this example, you will see what exactly you should do to trade intraday price action with the pin bar.
In the above picture, you are watching the EUR/USD daily chart. The price moved down with impulsive bearish pressure and after a specific volatility price moved up with impulsive counter pressure. Therefore, your intention for intraday should be to follow the major direction on the daily chart.
In this picture, you can see the hourly chart of EUR/USD, and you can simply see how the hourly candles reacted towards the direction from the daily candles. So follow these steps for intraday trading using pin bars:
- Identify the market direction with daily prices, market context, and economic stability.
- Use dynamic levels of 20 EMA on the hourly chart and wait for the price for rejecting from the 20 EMA with a pin bar.
- Use stop loss below or above the previous swing and use the next support or resistance levels as a target point.
- Make sure to avoid trading during market volatility and uncertainty.
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Conclusion
The forex market is the most liquid market in the world. The major market players in this market are central banks, insurance companies, and institutional traders. The involvement of retail trading is minimal compared to them. Therefore, there are some risks associated with the forex market.
You should have proper money management and trade management skills to fight with the situation. Do not jump with all of your trading capital when you see your trade setups. Make sure to take not more than 2% risk per trade and understand the bigger picture before taking any trading decisions. AtoZ Markets team has created a free and simple risk management tool that you can use.
Should you trade with pin bar trading strategy on your own at all?
Before you start trading with pin bar strategy, you'll want to read this.
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