SMA Pin Bar Forex Trading Strategy

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The SMA Pin bar indicator is a built-in indicator on most MT4 platforms. However, even though this indicator is available for use to most traders, only a few traders make use of this indicator.

Much like the Bollinger Bands, Keltner Channels, and Donchian Channels, this indicator is a band-based trading indicator. However, due to the difference in how it computes for its midline and outer bands, it has characteristics that are quite different compared to the other band-based indicators.

The indicator’s midline is typically based on a Simple Moving Average (SMA). However, the MT4 allows for the indicator’s midline to be modified. The moving average could be simple, smoothed, exponential, or weighted. It could also be applied to the close, open, high, low, median, weighted, or other configuration. Its outer bands are also based on the same moving average configuration as the midline, however, it is shifted up and down based on a certain percentage of the midpoint.

Pinbars are distinguished by their long tails, also known as "shadow" or wick on candlestick charts. They have a smaller body in comparison. The tail is more reliable than the formation, in fact.

Pinbar signals are a great way to enter trending markets. They offer high-probability entry points and a good risk/reward ratio. This signal is a reversal scenario, which shows that bulls and bears really are fighting for the price to go upwards or down. To confirm a bullish Pinbar it is necessary that the pattern form within a bearish trend. A bearish Pinbar must be confirmed by a bullish trend.

These steps will help you identify a Pinbar signal indicating a reversal of the bullish trend.

• Calculate the length from the highest point to the lowest.
• If the price rises above the lowest point, a short position may be considered.
• You can place a stop-loss order at the highest point on the bearish Pinbar.
• The minimum Pinbar length can be calculated below the entry point. This is where you can place a take-profit order.

Indicators:

• Envelopes
• MA method: exponential
• Period: 5
• Apply to: close
• Deviation: 0.20%
• Pinbar

Timeframe: 1-hour chart only

Currency Pair: any

Trading Session: Tokyo, London, New York

How to trade with SMA Pin Bar Forex Trading Strategy?

Combining these two concepts, the Envelopes indicator and a pin bar pattern allows us to take mean reversion trades on price extremes.

The Envelopes outer bands are considered extremes. Whenever price goes over these lines, the market would be considered overextended. Then, if the next candle closes as a pin bar with the wick touching the outer band, then we would consider the rejection of price as confirmed. This gives us the signal to take the mean reversion trade.

However, because this type of mean reversion strategy typically goes against the short-term trend, we will only be aiming for the mean, based on the Envelopes’ midline.

Buy (Long) Trade Setup

Entry

• The price must touch or go below the lower band signifying that the market could be oversold
• Wait for the Pinbar indicator to print an upward arrow signaling a bullish pin bar pattern
• Enter a buy market order at the close of the pin bar pattern

Stop Loss

• Place the stop loss immediately below the entry candle

Take Profit/Exit

• Close the trade as soon as price touches the midline of the Envelopes indicator

Sell (Short) Trade Setup

Entry

• The price must touch or go above the upper band signifying that the market could be overbought
• Wait for the Pinbar indicator to print a downward arrow signaling a bearish pin bar pattern
• Enter a sell market order at the close of the pin bar pattern

Stop Loss

• Place the stop loss immediately above the entry candle

Take Profit/ Exit

• Close the trade as soon as price touches the midline of the Envelopes indicator.