This section explains what the pin bar is. Following sections explain how it may be traded. Generally examples are only given for pin bars pointing one way. The same concepts can be applied to pin bars pointing the other way (just reverse the concepts!).
Trading is a probabilities game. There is always risk of loss and the trade going ‘the wrong way’ after the pin bar has formed. All we can expect to do is to tip the odds in our favour. When good pin bars are traded then a trader can tip the odds in their favour. Some trades will result in losses; such losses will occur with any trader from time to time. (Even a good pin bar setup may result in a loss!)
Looking at Figure 1 we can see what a completed pin bar looks like. See that this Pinocchio bar (which is abbreviated to ‘pin bar’) is poking his long nose outwards and is telling you a lie (an untruth) about where the price is going. The name is based on the old European story about the wooden boy, Pinocchio, whose nose grew longer every time he told a lie.
The bigger the lie the bigger the nose! For us this means that we want a nice long nose when we see a pin bar. We trade in the opposite direction to where the nose is pointing (so the pin bar in Figure 1 indicates that traders should be taking short positions while trading EURUSD). The high of the bars on either side of the pin are the ‘eyes’ for the pin bar. Note that the open and close of the pin must be within the left eye. For a nose pointing up, this means that if the high of the eye is roughly at the 1.2175 level (as shown in Figure 1), then the open and close of the pin bar must be below this level of 1.2175 (as is the case here). If the open/close is outside of this level then it is not a real pin bar (see the Advanced Tutorial for some ideas on how a trader might deal with a bar that looks like a pin bar but fails to meet this requirement).
The pin bar means that the price is going to move in the opposite direction to where the nose is pointing. In Figure 1 the nose is pointing up so the trader should expect prices to move down.
A pin bar must:
• have open/close within the first eye,
• protrude from surrounding prices (‘stick out’ from surrounding prices); it cannot be an inside bar.
A good pin bar has:
• a long nose (and a long nose relative to the open/close/low),
• a nose protruding a long way from the prices around it (it ‘sticks out’),
• the open / close both near one end of the bar.
The pin-bars can be played by themselves as they occur on the charts. One forexfactory.com member did some automated back testing and found that merely playing a pin bar does not provide spectacular results. You need to carefully select the pin bars you want to play. The best pin bars are played as they bounce off either:
1) Fibonacci levels (retracements of the previous move)
2) Important pivot levels
3) Moving averages
4) Confluence (several MA or Fib levels in the same general region)
5) Swing high / swing low
6) Retracement of the current move (must retrace a minimum of 23% fib retracement of the current move), which is a lower probability play.
For the BEST results a trader may play a pin-bar on the swing high (or swing low) or a pin-bar that is bouncing off confluence (of MA and Fib levels). The pin bar is a very reliable setup under these circumstances, indicating that there is a high probability that prices will change direction – which is very tradeable setup!
Shown is a cluster of Fibonacci retracement levels from the big moves down during 2005. Note that the pin bar is bouncing right off these. This means that the pin bar has bounced off an area of confluence!
Shown in Figure 2 is a close-up of the pin bar that formed on the EURUSD pair weekly chart. Notice that there is confluence of fib retracement levels from the more recent previous movements down. This pin bar has punched through these, after three previous bars were bouncing off this area. This would have been a good pin bar to catch. The three previous bars failed to move through this area, showing it has significant resistance. The pin bar has moved a long way through it before moving right back down again. The high made by the pin bar is probably the highest price that will reached for weeks (or months).
Is this a good pin bar formation? The nose of the pin bar pokes out a long way above previous prices. It has made it through some resistance at the confluence of fib levels and bounced off the longer-term fib levels (in Figure 2). The open and close are below the high of the previous bar (the eye). Yes – this is a good pin bar.
By : Lincoln (a.k.a. lwoo034 at Forexfactory.com forums)
Next.....Playing the pin bar