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The Pin Bar pattern and how you should trade it

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The Pin Bar pattern is one of my favorite trading patterns.

It is also probably one of the most powerful, Price Action, patterns if it is being used correctly.

It is a one candle formation which is simple to understand, simple to trade and still, you can catch some really powerful moves by trading it.

Sounds perfect, right?

The problem is that many traders fail to distinguish between a good Pin Bar and a bad Pin Bar.

There’s a story behind each Pin Bar candle – When you’ll learn to read the Pin Bar “story” correctly, you’ll master the Pin Bar trading technique.

In this blog post, I will explain what is a Pin Bar pattern, what are its trading rules, how to avoid common mistakes and how I use it as part of my Price Zones strategy.

If you want to learn more Price Zones, Price Action, Harmonic Trading or simply get trading tips that will help you improve your trading performance – Visit the Market Zone’s Learning Center when you’ll finish reading this blog post

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What is a Pin Bar?

A Pin Bar pattern, similar to a “Hammer/Inverted Hammer” from the classical candlesticks pattern, is a pattern with a small body and a long tail:

Pin Bar Patterns

Pin Bar Patterns

For those of you who aren’t familiar with candlesticks:

The “Body” of the Pin Bar is the small “boxes” you see at the top/bottom of the patterns – The body represents the “Open Price” and “Close Price” of the candle (the time period it represents)

The “Tail” parts are the straight lines you see in the examples above (look like a tail) – The top/bottom of the tail represents the high/low (prices) of the candle (the time period it represents).

Understanding what the body and tail mean, helps to understand the story of the Pin Bar patterns (I will detail more below).

For the time being, let’s take one example that will help you understand – The story behind Pin Bar number 1 (see above) is that within the time period of the candle, the buyers tried to push the price higher but failed to succeed. Before the close of the candle, sellers regained the control and drove the price back down, even below the “open price”.

The four (4) Pin Bar patterns shown above are:

  1. Bearish Pin Bar with a bearish close
  2. Bearish Pin Bar with a bullish close
  3. Bullish Pin Bar with a bullish close
  4. Bullish Pin Bar with a bearish close

Each of these patterns tells a different story.

If you understood just the basic part of the Pin Bar’s story (the story of its own formation) so far, you probably understand that if you want to be a seller, you will prefer to see Pin Bar number 1 forming inside your Sell Zone…and if you want to buy, you will prefer to see Pin Bar number 3 inside your potential Buy Zone (read more below).

The Pin Bar pattern’s trading rules

The Pin Bar pattern comes with a simple set of rules that includes Entry Timing and where to place stop loss orders.

The Pin Bar pattern rules do not where the targets should be – Those can be set based on Structure Analysis, trend lines or Fibonacci Levels (for example).

Pin Bar Patterns

Pin Bar Patterns – Trading Rules

Bearish Pin Bar Rules:

  • Sell if the following candle closes below the body’s low.
  • Place your stop loss above the Pin Bar’s tail.

Bullish Pin Bar Rules:

  • Buy if the following candle closes above the body’s high.
  • Place your stop loss below the Pin Bar’s tail.

Notice that the entry is based on the following candle’s close (!) By following this rule you will avoid fake patterns.

Here’s an example:

EURUSD analysis

Bearish setup – EURUSD

In this example, you can see a daily Pin Bar pattern that was formed at the top of a weekly trading range.

The Following daily candle tried to close above the Pin Bar’s low but failed to do so.

The close below the Pin Bar’s low provided the trigger for a bearish entry.

The bearish wave that followed the Pin Bar reversal pattern stopped only when EURUSD reached its 200 days MA line – A 400 pips decline.

Here’s another example of a Pin Bar pattern without a trigger:

Pin Bar Patterns

GLD – Fake Pin Bar pattern

As you can see, despite a very impressive bearish Pin Bar formation (very long tail and a tiny body), the following candle did not close below the Pin Bar’s low and instead of a bearish move, we got another rally in Gold’s prices.

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The Pin Bar’s story – “Behind the scenes”

In order to simplify things, I will use the daily time frame for my explanations in this paragraph – That means that when I write about a Pin Bar pattern I mean a daily candle (24 hours candle).

As mentioned above, the Pin Bar formation (like any single candle) tells us a story.

In the Pin Bar’s case, the story is about a potential shift in the power balance between Buyers and Sellers within the time period of the candle.

For example, if we will take Pin Bar number 1 as an example (from the Pin Bar patterns picture above), we can tell that this candle represents a situation in which the bulls tried to gain control during the day, but a strong intra-day shift in sentiment gave the victory to the bears – The price was pushed back below the open’s price despite the rally attempt.

Pin Bar number 2 represents a similar case, only that the “close price” was higher than the “open price” – That can be counted as points for the Bulls (despite the daily loss).

If you understand the difference between the two, think about this question – which pattern would you prefer to trade in a downtrend?

The truth is that according to Price Action Rules, you can trade them both.

The Price Action methodology doesn’t care about the color of the body (the Open Vs. Close) – It cares more about shapes, formations, structure levels and trend lines.

But, based on experience, understanding the candle’s story adds tremendous value to the success probability of my trades.

The more elements that you can add to the pattern’s story, the better:

  • Trend status – Does the intra-day shift support the underline’s trend?
  • Structure Levels – Does the pattern appear inside a weekly structure zone?

These details (just two examples) can provide you with information that will allow you to understand the context of the Pin Bar pattern – Why there was an intra-day shift in sentiment.

Here’s an example – A Bullish Pin Bar pattern (with a bullish close) forming when AAPL is testing support in an uptrend:

Pin Bar Patterns

AAPL – 4H Bullish Pin Bars in an uptrend

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Common Mistakes to avoid when you trade Pin Bars

Over the years that I’ve been working with traders, I’ve seen many of them trying to trade every Pin Bar formation out there.

The simplicity of this pattern (just a single candle) leads people to trade it whenever it shows up. The problem with Pin Bar formations is that they can appear quite frequently and therefore we there are plenty of false patterns.

Here are few mistakes that you should avoid:

The higher the time frames, the better the pattern:

Just like any other technical pattern, Pin Bars are much more reliable patterns when they are found in higher time frames.

Although you can successfully trade Pin Bars also on an hourly time frame, 30 minutes and even 5 minutes charts, you will be much more exposed to fake patterns.

Focusing on higher time frames patterns will improve your probability of success.

The trend is your friend

Although Pin Bar patterns occasionally mark the end of a trend, they are much more powerful when being traded with the trend.

Seek to trade bullish Pin Bars with bullish closes in an uptrend, or bearish Pin Bars with bearish closes in a downtrend.

Pin Bar patterns

USDJPY – Bullish Pin Bars in uptrends

Pin Bar Patterns

XLF – Weekly bullish Pin Bars in a yearly bull trend

Follow the trading rules – Stop loss

Quite often I see traders trying to trade Pin Bars with a tight stop loss (read how to set stop loss orders).

Their assumption is that the Pin Bar itself, by representing a shift in sentiment, is enough of an assurance that the price won’t return to try to test the Pin Bar’s high/low (depends on the Pin Bar) again.

Although it may work for you once or twice, using a tight stop loss can get you stopped out of a good setup.

If the required stop loss is too wide for you but you still wish to trade the pattern, simply reduce your position size! Don’t let fear stray you away from the trading rules.

Pin Bars and Price Zones

My Price Zones strategy aims to find high probability turning points by finding strong technical confluence zones of several technical elements.

When I find such a zone (a Buy or a Sell Zone), a Pin Bar which is forming inside the Price Zone (on the same time frame or on a lower time frame) provides a preliminary confirmation signal to the presence of Buyers/Sellers in my zone.

Here’s an example:

Pin Bar Patterns

Crude Oil – Weekly Pin Bar inside a Sell Zone

The chart above shows a potential Sell Zone that I’ve recognized in Crude Oil’s weekly chart.

The Sell Zone, between 54$ and 55$, included a weekly structure, a harmonic trading pattern, the top of a trading channel and a weekly double top.

The bearish trading scenario was confirmed with a weekly Pin Bar just before Oil prices crashed down to 50$ and then 42$.

Summary

Pin Bar patterns, despite their simplicity, are powerful trading patterns that you should definitely include in your trading tools arsenal.

If you’ll understand the patterns context and train yourself to separate between false patterns and high probability ones, you will fall in love with these patterns… just like I have.

Follow the trading rules and avoid the mistakes mentioned above. Practice to improve your performance and don’t forget to use the proper risk management rules!

Any pattern can be violated. You don’t want to get caught off guard.

If you want to learn more about Pin Bar pattern and see how I use them on a daily/weekly basis – Join my Elite Zone mentoring program.

Let me show you how to trade like a pro.

You can also subscribe to my Free Weekly Newsletter – Your Trading Edge, each Sunday.

 


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