This article describes the use of the pinbar candle in executing trade strategies for the FX market.
What is a Pinbar ?
Pinbars are reversal candlestick patterns that are made up of one single candlestick. The shape of the pinbar provides information as to what buyers and sellers are doing in the market.
A bullish pinbar is an indication that lower prices have been rejected. Usually, this is shown as the hammer candle, where the bears open the candle, but the bulls force the price back up but not as high as the open or high price, resulting in a candle with a body and a lower shadow that is usually longer than the upper one. A bearish pinbar occurs because higher prices have been rejected by the bears. The upper shadow is formed because after the bulls opened the candle and pushed prices up, the bears appeared and forced prices down.
However, pinbars can appear anywhere on the charts, but the pinbars that appear after a prolonged trend are usually significant, because they are indicative of trend exhaustion and possible reversal. We use the word “possible” because other confirmatory signals are required before a trade can be executed using the pinbar setup.
It is essential to consider several factors when using the pinbar for trade execution. One of the considerations is the time frame in which the pinbar appears. Usually, the daily chart is the best indicator of the trend of an asset, and provides information that is more accurate than that coming from a lower time frame. Therefore, if you see a pinbar in a lower time frame, it may actually just be a mild retracement in the context of the bigger picture on the daily chart. This is akin to trading against the trend, which is not advisable.
A pinbar which appears on the daily chart will be much more significant and should be considered more strongly.
Three Pinbar Strategy Errors to Avoid
Traders commonly make these mistakes when trading with pinbars:
- They assume that the market will automatically reverse when a pinbar appears.
- Consider the pinbar as being more important than the candles that appear thereafter.
- Assuming that all pinbars are equal.
Do not fall into these traps. We will now identify these three mistakes and how to avoid them.
Error 1 – The market will reverse when a pinbar appears
This is not always the case. It is not every time that a bullish-looking pinbar will cause an upward reversal after a downtrend, or that a bearish pinbar will halt a strong upward trend. Pinbars are single candlesticks and never give the full information. They only give a hint; what completes the information is what the next few candles do on the chart in relation to the pinbar. Never base your analysis on that one single pinbar.
Error 2 – Considering only the pinbar and neglecting other candles
You may think that a pinbar appearing after a period where prices have trended will signal a reversal, but is this really the case all the time? Look at this example below:
This is a DAILY chart for Bitcoin/USD, showing downtrending prices. Then a pinbar appears. Surely prices will reverse upwards right? WRONG, as we see in the price action that followed thereafter.
We can clearly see that there was indeed a resistance in active play formed by a second trend line (TL2), which prevented the seeming upside reversal from the pinbar from progressing further. Price was rejected at that trendline and the downtrend continued.
This shows the folly of considering only the pinbar without looking at what else is going on around the pinbar.
Error 3 – All Pinbars are Equal
All pinbars may look equal, but the truth is that some of them are more equal than others, to borrow from George Orwell’s classic novel Animal Farm. A pinbar with a long shadow is definitely more significant than a pinbar with a short shadow.
A long shadow indicates a strong reversal pushback from the traders opposing the trend. If the candle before the pinbar is short and the next one following the pinbar is a long one which assumes the direction of the reversal, this indicates that the trend momentum is waning.
In this chart, notice how the pinbar shadow is quite long, and how the next candle closed even lower than the pinbar low. It is not surprising that prices eventually reversed to the downside.
Longer pinbars = stronger price rejection = greater possibility of reversal
Components of a Sound Pinbar Strategy
Your pinbar strategy must therefore incorporate these three things:
- Trade with the trend
- Trade from key areas of support and resistance
How can these be incorporated into your pinbar strategy?
- Trading with the trend
Trading with the trend simply means that your pinbar must be traded using the trend as a guideline. For instance, if price is retracing on a daily chart and a pinbar forms at the resistance or support line that is pushing the trend, take the trade at this point for the best returns possible.
On this daily chart of Gold/USD, there was a downtrend with a resistance line which capped price action. An upside retracement to the resistance line occurred, with the formation of a bearish pinbar at two points. The trade here is to Sell at this resistance to follow price action.
- Trading At Support or Resistance
The same rule applies at support and resistance areas, defined by trend lines or if you are trading a Fibonacci retracement setup, defined at the level of the retracement levels.
If there has also been a break of the resistance or support lines, and a pinbar forms in the direction of the break, you can trade this setup as well, since the pinbar is significant in the context of the reversal breakout.
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