Trading Pin Bar Reversal

Trading Pin Bar Reversal

A picture paints a thousands words, and that's how we should view our charts where each candle  describes what's currently happening with price as well as it's history. Candles are always born neutral, after birth they can grow to become either bearish or bullish. Now if there's a candle that can describe exactly who won the battle between bears and bulls it our famous pin bar. In the next few examples I will discuss charts with EMA, Support and resistance, Trend lines & Swing High & Lows. Please feel free to seek examples using other methods and indicators with pin bars.

Horizontal Support & Resistance

In the chart above we can see that there is a strong horizontal  level / zone, where on numerous  occasions price action found either support or resistance. In the later part of the chart a strong breakout of this level to the upside occurred and we can see that horizontal level previously  resistance now has become support. Now that price has broken out we can wait for a pullback back to this horizontal level for a price action signal to enter the market and follow the momentum to the upside.

EMA

This chart we can see that price was ranging for a while bouncing off strong support. A pin bar signal formed where we can see price moved aggressively to the upside. Please note when taking a reversal candle or counter trend trade make sure that the candle closes in the direction of the trade, so for this example the first pin bar would not be traded as it didn't close as a bullish pin bar and it wasn't the best looking pin bar as it looked like more of a indecision candle. The next 2 highlighted pin bars are tradeable where we can see price rejecting EMA off short term support.

Trend Lines

In this chart we can see a strong uptrend is in place where swing lows are being formed as price moves up. On the chart I have highlighted a valid pin bar allowing us to enter the market.


Conclusion

The Pin Bar Candlestick reversal pattern is one that not only happens to occur quite frequently, it is also one of the most powerful reversal patterns available to a forex trader. This pattern can be traded on any time frame and is best traded from major price action levels like previous support and resistance or pivot points and the like. The better the Pin Bar formation the higher the probability and the better the location the higher the probability. Only take the best Pin Bars in the best locations and the rewards will speak for themselves.

The Perfect Candlestick - Pin Bar

Now that we know how to read a candlestick patterns correctly, we can now apply one of the strongest reversal signals for price action and that's the Pin Bar. In this article I will discuss how to identify the perfect Pin Bar and where best to find this pattern.

A Pin Bar is a candlestick pattern where the body of the candlestick is very small and has a very long wick. If this rule is to be followed then you will limit yourself to this perfect pattern and missing out on an awful lot of good trades. This pattern comes in many forms and it is up to you what identifies as a tradable Pin Bar and a non-tradable one.

Here are some examples of Pin Bars that I find are acceptable and will not hesitate to initiate a trade from.

What to look for in perfect Pin Bar

• Looking for a small body to the bar, the smaller the better
• Looking for a wick that is three times the length of the body, but the longer the better.
• Pin Bar with a wick that is ten times the length of the body has a much higher probability than one with much less.
• Pin Bar are like real estate its all about location, location, location.
• The wick must stick out from the surrounding price action.

Where do we look for these Pin Bar patterns 

As a price action trader I don't use any indicators allowing my charts to be as clean as possible, however this is not to say that there isn't valid tools/indicators that can be used to confirm confluence to enter the trade.

Here are a few ideas or ways to be used with pin bars to validate a potential trade.

• Previous major swing highs or swing lows
• Any major levels of Support and Resistance
• EMA
• Pivot Points
• Trend Lines
• Round Numbers
• Fibonacci levels

Now that we have the basics of what and how a pin bar should work in the up and coming article I will demonstrate with a few charts some of the ways to enter these trades.

 

Identifying Trend Direction

The term "Trade with the trend" or " The Trend is your friend" is often used in the world of trading but many people struggle to identify trend direction. The reason that people struggle to identify trend direction is due to the fact that financial instruments don't move in a straight line and the trend may be different depending on which time frame you viewing price.

To identify a new trend I use dynamic support and resistance as well as trend lines bounces and in both cases we will need to know how to use swing highs and swing lows effectively to call the direction correctly. Swing high or low is when price is moving a certain direction and then pulls back or has a pause before resuming in the direction it was moving in. Below are examples of a swing high and swing low candle formation.

  

A swing high is formed when the high of a price is greater than a given number of highs positioned around it. 

A swing low is created when a low is lower than any  other point over a given time period.

Now that we are able to identify what a swing high and a swing low is we can now apply this to our charts in the following manner. In the below chart we can see how the swing highs and lows rejected or bounced off the EMA also know as the dynamic support and resistance.

In the below diagram a trend can be seen by drawing a line and joining the swing high and lows. In this example the swing lows where joined and now we can clearly identify the trend direction. A trend line is only a trend line if there are 2 or more touches. In the same diagram I left the EMA indicators on the chart so that you can see how the swing lows react almost the same way to the trend line drawn.
 
To draw trend lines I suggest you zoom out into the larger time frames and draw 1 or 2 obvious trend lines on each chart. Example lets say you are working on the 4H chart where a valid price action signal is present and you want to identify the trend. Start by zooming out to the weekly time frame drawing the most obvious trend lines on the chart then work you way on each time frame until you get to the 4H. These trend lines will indicate true valid key levels.

The one thing we will never know is when a new trend starts or finishes therefore we should wait for  market to confirm the new bias. In the case with trend lines if price breaks the trend line we can say that a new trend maybe forming, however a trend line needs 2 or more touches to confirm a new trend is in place. The same could be said about dynamic support and resistance.  In both these cases we can say that the second retracement are always important after a new trend.

Now that we have the tools or methods in identifying a trend, combing this with horizontal support & resistance levels as well as a valid price action signal we can confidently enter the market with a high probability trade.

Price Action with Dynamic Support and Resistance - Part2

This article is a continuation from the original Price Action with Dynamic Support and Resistance. I have decided not to place to much emphasis on the explanation but mention key points why we use it.

• Markets often respect dynamic support and resistance on all time frame periods
• Price action signals often occur at these levels
• Trade lager time frames such as Daily and 4H as smaller time frames can be more volatile 
• The more price touches the EMA lines the more the market starts to respect the trend
• Help us identify trends and the market bias
• Once we have identified the trend we can also take the slope into consideration
• I don't just trade the cross of the EMA, the reason being I could of entered a trade before the cross occurred with a counter trend price action signal. At a later the stage the EMA's may cross only to validate my entry.

Counter Trade Example

•  The safest way to enter is to wait for the EMA's to cross and once a clear trend is starting to form I could then enter a trade based on a valid price action signal in the direction of the trend. If the market makes an aggressive move either up or down wait for a pull back and if a price action signal appears then enter the trade. Example below doesn't have a valid price action signal this was to demonstrate the best level to enter at, however we could find a valid price action signal at the same level in the smaller time frames such as 4H and 1H.

Pull Back Entry Example / Diverging Trend lines

•  EMA should be used in conjunction with other analysis tools such as price action signals and horizontal support and resistance.
• When the EMA's lines cross and in a obvious direction  we can assume that this is the new short term trend being formed.
• Lets assume the EMA's crossed and new trend has been established and sometime in the future we see price break above the EMA's lines, but the EMA's have not crossed back in that direction we can assume that the trend is still in place and that price will eventually continue in the direction of the current trend.
• Once a trend has been set the EMA will start to diverge the further apart they move the stringer the trend. See image above for diverging trend lines.

Price Action with Dynamic Support and Resistance

In my previous article Trading Key Levels with Price Action, the main topic discussed was using a price action signal off these key event areas to enter the market. These key event areas are also know as support and resistance levels and are marked by horizontal lines drawn across bar highs and bar lows or near the same level. The other category is the dynamic or moving support and resistance levels which are marked by moving averages.

There are several different types of moving averages (MAs) in use by Forex traders. In fact, moving averages are the most common technical indicator across all financial markets, including the Forex .They are called "moving" because each new chart period is included in the calculation, while the oldest period is discarded. This has the effect of the average moving along as time passes and the chart develops. The indicator I use mostly is the EMA. The main reason that early chartists developed the exponential moving average was that they felt the SMA was too reliant on old data, and too slow to react to recent price action, so they devised a way to give the most weight to the most recent price action, and to let the weight taper off as you move back through time on the chart. I'm sure you asking what values should I use? It all depends how you analyzing price and over what  period. Most traders use 50, 100, 200 which allows them to see what the average price did the last 50, 100 and 200 days.

Now I'm sure you questioning the fact that I'm advocating that I trade purely price action without indicators so why am I discussing this? I use EMA for two things for trend analysis and  to identify dynamic support and resistance levels. It's pretty simple when the 2 lines example 50 and 100 EMA cross higher then we have a bullish trend in place, if they cross lower then the opposite applies. Please keep in mind that EMA only works for a trending market but when markets are range bound we need to rely on the static support and resistance levels. Trading with the trend you will want to trade away from the EMA or if you get a very obvious counter trend signal you will then trade toward the EMA.

 From the chart below we can deduce that price has bounced off EMA many times in the course of this recent uptrend. This demonstrates how valuable these levels are in showing us the dynamic or moving support and resistance levels.

Now if we take both static and dynamic support and resistance levels as discussed above and in conjunction with a price action signal this usually gives me a high probability setup that I can take advantage of. 

Hope this article can contribute toward your success in trading

Happy pipping!!