Today I’m going to show you exactly how to trade pin bars for consistent profits.
I’m also going to share my favorite entry methods and a combination pattern with a ridiculously high win rate.
The pin bar was the only pattern I used when I started trading over a decade ago, and I still trade them today because they work.
So if you want to massively boost your trading profits this year, you’ll love today’s blog post.
Let’s get to it!
What is a Pin Bar?
Before getting into the actual Forex pin bar trading strategy, we need to understand the characteristics.
Let’s start with the tail, which is its defining characteristic and is also sometimes called the wick or shadow.
The tail of a pin bar should be at least 2/3 the length of the entire bar.
The longer, the better, but it must make up at least 2/3 of the bar from end to end.
Notice in the image above, the tail is about 3/4 of the entire bar, so this qualifies.
The body is also important as it represents the open and close of the pattern.
The open and close should be close together; the closer, the better.
The body should also be close to the end of the pin bar. Notice how close the open and close are to the nose.
Last but not least, the nose.
While not as important as the tail or body, the nose is important only as it relates to the tail and body.
This is because if the tail is at least 2/3 of the entire bar and the body is small, then the nose should also be relatively small.
Know too that the pattern doesn’t need a nose to be valid.
Sometimes it’s non-existent if the open or close occurs at the extreme end of the pin bar.
The Two Types of Pin Bars
There are two main types of pin bars as it relates to price action patterns that are taught in my price action course.
Most traders assume the pin bar is only a reversal pattern. And while it can signal a reversal, it can also be a continuation pattern.
First, let’s look at the more common way to trade pin bars as a reversal pattern.
Pin bar reversal pattern
The reversal pin bar (above) is best played in a ranging market or on a pullback within a larger trend. Let’s look at both in action.
Below is a great example of a reversal that formed after price broke through support and then retested it from the other side as resistance.
This is actually a pattern that’s still taking shape as I type this.
Here are two more examples that occurred at range highs.
So far we’ve seen pin bars that form on pullbacks as part of a larger trend as well as ones that form in ranging markets.
Now let’s look at the less common way to trade them as a continuation pattern.
Pin bar continuation pattern
The differentiating factor here is that the continuation pattern doesn’t have a pullback (or very little) relative to the examples above.
The key to this pattern is that the pin bar must form in the direction of a trending market.
Notice the pin bar just in front of the one I’ve identified in the chart above, the one that’s facing the other direction.
It’s also a valid pattern.
However, it’s going against the trend, so it would not make for a good trade.
Here’s a zoomed-out chart of the same setup to see what I mean…
I wanted to put this chart up for three reasons.
To show that our pin bar would have given us a nice gain because it’s well-formed and in the direction of a strong trend
The first pattern that formed in the chart above was against the trend, so it would have been a “no trade” for us
The reversal pin bar I pointed out in the chart above is technically perfect. However, it would have been a “no trade” for us. If you said because it’s against the trend, you’d be right! But there’s another reason why we wouldn’t have traded that reversal and it’s described in the next section.
Pin Bars and Confluence
Confluence is the coming together of two or more “things”.
For Forex traders, confluence means the coming together of, or combination of, two or more price action patterns, levels, or indicators.
Let’s look at the setup below, which is the exact same setup we looked at before, only this time we’ll start identifying our “factors” of confluence.
Let me clarify what’s happening here by identifying the various factors at work.
To make this as applicable as possible, I’ll go through each factor as if I were doing my own analysis.
So there you have it, a simple pre-trade analysis using confluence factors. It’s really that simple.
I should point out that #4 above isn’t technically considered a confluence factor, but clearly identifying support and resistance levels is an extremely important part of any pre-trade analysis.
You’re probably wondering what the two moving averages are all about.
Well, I use the 10 and 20-period EMAs in my trading. I find that they help to quickly identify the trend and also act as dynamic support and resistance.
As a side note, you might find that I don’t use them on all the charts posted on this site, but that’s only because I don’t want to unnecessarily clutter the price action patterns.
You are probably on to it by now, but I want to point out why that reversal pin at the top of the GBPCAD chart above doesn’t fit our criteria. So here it is…
In other words, we didn’t have the necessary confluence to consider this a worthy pin bar to trade.
It has everything going against it except that it is a well-formed pin bar.
The two most important reasons why I wouldn’t trade the reversal pattern above are:
That about wraps up confluence. Think of these confluence factors as your pre-trade checklist, similar to a pilot’s pre-flight checklist, only ours is a LOT shorter…at least I hope.
Pin Bar Entry and Exit Methods
Now that you have a firm understanding of the pin bar candlestick pattern and how to identify them, let’s discuss entry and exit strategies.
But before we do, I want to touch on the concept of a favorable risk to reward ratio.
You see, every trade setup you take, whether it be in the forex market, crypto, or any other should have a favorable risk to reward.
That means the reward should heavily outweigh the risk.
My minimum to take a trade is a 1:3 risk to reward, meaning the potential reward from the setup is three times larger than the risk.
So if I’m risking $1,000, my minimum reward as defined by my profit target must be $3,000 or better.
However, although 1:3 is my minimum, I aim for 1:5 setups or better.
In trading, we express this as 3R or 5R, where “R” is the risk and the “3” or “5” represent the reward as a multiple.
Alright, with that covered, let’s get into our entry methods.
Entry Method #1 – Break of the Pin Bar “Nose”
The break of pin bar nose entry is the more common and conservative way to enter a pin bar trade.
Entering on a break of the pin bar nose involves placing a stop order just beyond the nose of the pin bar.
In the example above, we would place a sell stop just below the pin bar nose.
The distance at which you place the order is really personal preference and depends on the currency pair traded, but a good rule of thumb is 10-20 pips.
This allows for some room in case of a false break.
Entry Method #1 – 50% Retrace Entry
This is my favorite way to enter a pin bar trade.
It’s my favorite because it allows for a much better entry, thus increasing the potential R-multiple considerably.
This means that on a potential 2R trade using the break of pin bar nose method, you can now get a potential 3R or better using the 50% entry method on the exact same trade setup.
If used properly, the 50% of pin bar entry can have a drastic effect on your account balance over time.
To get our pin bar entry level using the 50% rule, we simply drag the Fibonacci Retracement tool from the top of the pin bar tail to the bottom of the pin bar nose.
Of course if this were a bullish pin bar we would drag the Fibonacci Retracement from the bottom of the tail to the top of the nose.
Over time you’ll become so comfortable with this pin bar entry strategy, that you won’t need to use the Fibonacci Retracement.
Until then it’s good practice to draw it out as it will help keep you disciplined.
Although the 50% entry can provide better returns, it’s not without flaw.
About half the time (even less on some currency pairs) the market won’t retrace 50% of the pin bar, leaving your buy or sell limit order unfilled.
This means that if you find an exceptional pin bar setup and decide to use the 50% pin bar strategy, there’s a chance your order may not get filled and you’ll be left behind.
There’s nothing worse than waking up in the morning to see the market has run 200 pips in the desired direction but missed your limit order by 5 pips.
But it’s a chance that many, including myself, are willing to take in order to squeeze out a higher R-multiple.
Where to Set a Pin Bar Stop Loss Order?
So how do we plan for a potential loss on a pin bar setup? By always making sure we have a stop loss order in place.
The best place to set your stop loss on a pin bar trade is
above or below the pin bar tail.
This is true regardless of the entry strategy you utilize.
For a bullish pin bar setup we would place the stop loss just below the pin bar tail.
The distance at which you place the stop loss depends on your comfort level as well as the currency pair being traded, but a good rule of thumb is 10-20 pips from the end of the pin bar tail.
How to Set a Pin Bar Take Profit Order
Now for the really fun part, setting the take profit order for our pin bar trade.
This can be a little harder to explain, but I’m going to try and make it as straight forward as possible.
The first thing you want to do is to identify the support and resistance levels on the chart.
In reality this would be the very first step, even before identifying a potential pin bar setup.
This is because in order to know if a pin bar setup is valid you would need to know if it has confluence, and would have already drawn your levels on the chart.
While this is true, I always look for additional levels on a chart once I’ve spotted a potential pin bar setup.
I do this to make sure I didn’t miss any key levels that may effect the validity of the pin bar setup.
Using the same pin bar setup as before, the first level of support looks like it would come in around the .8987 level, so this would be a safe place to take profit.
In hindsight the market did drop further, but it’s always a good idea to set your take profit at the first area or support or resistance.
Once you get really good at the pin bar strategy, it’s possible to let some trades run further by watching how price reacts to a level, but for now just focus on taking profits at the first level.
Now that we understand how to enter a pin bar setup and how to exit one, I have a test for you.
What if we used the break of pin bar nose entry for the pin bar setup above – is there anything wrong with that?
I’ll give you some time to analyze it…
Okay, I’ll give you a hint, it begins with “R” and ends with “multiple”, oh and there’s a “-” in between. 😉
If you knew that, great job!
Because our first level of support (profit target) is so close to the pin bar setup, an entry on the break of the pin bar nose would violate our 2R minimum we set previously.
What to do?…if you said use the 50% entry method, you are spot on, good job!
Here’s what the two strategies would look like in action…
Hopefully the illustration above doesn’t look like something out of John Madden’s playbook.
But in case it does, let me break it down.
Using the break of pin bar nose entry strategy, we get a stop loss of 80 pips and a potential profit of 90 pips.
As mentioned previously, this violates our 2R minimum as our profit target would need to be at least 160 pips away, so there’s no trade using this type of entry.
Using the 50% entry strategy, we end up with a 40 pip stop loss and a potential profit of 130 pips!
See the power of the 50% pin bar strategy?
As an R-multiple, the break of pin bar nose entry becomes a 1.1R, while using the 50% entry becomes a 3.25R.
**If risking $100, that’s about a $110 profit using the break of pin bar nose entry strategy and approximately a $325 profit risking the same $100. **
That’s why I prefer the 50% pin bar entry; it’s powerful!
To Be Continued in next Post!
