Price action or Candlestick analysis combined with some of the factors and confirmations is the most important strategy that works out even without too many indicators on the chart. Using too many indicators on the charts makes it difficult for the traders to see the bigger picture(opportunity) in the market. We have numerous amount of candlestick patterns in trading, but there are few on which many traders have their eye on. One of these candlesticks is the Pin bar candle.
Pin bar candle(or the Hammer) is mostly used as a reversal pattern. A pin bar typically consists of a price bar with a long wick or shadow. The region between the open and close of the pin bar is called its real body, and a long tail called the wick. Pin bars generally have small real bodies in comparison to their long wick. The body of the pin bar is one-third of the total size of the candle. The long wicks of the candle show the area of the price that was rejected and signifies that the price will now move in the opposite direction of the wick.
The physiology behind trading a pinball candle is that when a price is moving in one direction and reaches significant support or resistance level, it gets rejections.
Rejection in a downtrend signifies that the seller pressure(supply) in the market is decreasing, and the buyer pressure(demand) has started increasing and vice versa.
The pin bar, either bullish or bearish, signifies that the price does not want to go more down or up and want to reverse from that strong support or resistance level.
Trading Strategies using Pin bar candlestick pattern
Every time a pin bar candle occurring at a strong level does not always mean that the market is going to reverse from that level. To make this valuable, we must have to see the overall picture and not just a single candle. In this trading strategy, we will see how we can analyze the overall market near that confluence level.
There are two types of pin bar candle.
- Bullish pin bar reversal pattern
The bullish pin bar candle occurs when the price comes near a strong support level; this leads to the formation of a long wick of the pin bar and shows rejection from that level. This candle usually forms at the end of a downtrend and signifies that there can be either a short-term uptrend or a full reversal forming a strong uptrend.
- Bearish pin bar reversal pattern
The bearish pin bar candle occurs when the price comes near a strong resistance level; this leads to the formation of a long wick of the pin bar and shows rejection from that level. This candle usually forms at the end of an uptrend and signifies that there can be either a short-term downtrend or a full reversal forming a strong downtrend.
Using pin bar candles with significant resistance and support level
As already mentioned, just finding a pin bar candle at the support and resistance level is just not sufficient to trade, we have to figure out what the market is exactly trying to show us. When we see the candles approaching a strong support or resistance level, we have to analyze all the previous candles carefully. If the candles are very big and the momentum is very high, it is less likely to bounce back from that particular level. So, what we have to do is carefully track the candles with wicks. Candles with wicks show that the particular trend momentum is getting weak, and the pressure is reducing as the level is approaching.
After we see candles with wicks and some weaker candles, we will wait for our pin bar candle. As soon as we see the pin bar candle, we have to wait for the next candle to close above the pin bar’s high. We can then buy or sell in the market and place our stop loss 2-3 pips below the pin bar’s low.
In the below USDCAD 1Hr chart, we can see that the market touches the support level 3 times, the first time the candle was a long and strong bearish candle, and so we must take trades as the picture is still not clear. The second time when the market reaches the support, we see the candles have small bodies and more wicks. This tells us that the seller pressure is decreasing. Finally, for the third time, the market started getting rejections even before touching the support level, and we can also see so many long wicks in the candles. Finally, we see a pin bar candle touching the support level and getting the rejection, and then we see so good bullish momentum.
Below is the chart of USDCAD 1hr market getting a rejection from the resistance level.
Trading pin bar with Bollinger Bands
We are already familiar with one of the famous indicator called the Bollinger band that is used to measure the volatility of the market. We will now use a pin bar with the Bollinger band and understand how we can find some good trades opportunities.
The below chart is USDCAD 1Hr time frame, over here we can see that the market has not pierced the lower band since a long time as mostly the price is between the upper and the lower band. Moving forward, when the candles come close to the lower band, we see a pin bar occurring after the market gets rejection. After the formation of a pin bar candle, we can see the market getting the buying momentum, and it becomes bullish.
Trading with confluence level-(Resistance and Bollinger band)
As from the above strategies, we are clear how the market behaves when a pin bar occurs at strong support and resistance level and the extreme level of Bollinger band. Now we will see what happens when a pin bar occurs at confluence level. A confluence level is an area that is on the radar of many traders, and many technical indicators generate the same signal. This trading concept is used by price action traders to filter their entry points and spot high probability signals in the market.
The below example is the pin bar forming at the extreme lower band and a strong support level. We can see that as the market reaches the support level, bodies of the candles get weaker and smaller, forming longer wicks. Also, the pin bar pierces the lower band near that support level giving us a better signal for a buy.
Talking about the entry and exit points, our entry will be the point when the next candle crosses the high of the pin bar candle. As we see, it is a bullish pin bar; we can be sure that our entry is good if it crosses the high with good momentum. Our exit here will be the next strong resistance level. If you use a trailing stop loss, then we can move the stop loss to breakeven and be in the trade as long as you see the higher high higher low as, after a trend reversal, the candles move very fast and gives more profit and risk to reward ratio.
Trading with a pin bar candle has been proven to be one of the most effective trading strategies. As we saw, we must have a watch on all the candles when it approaches a confluence level because a single candlestick will not give us much information about what market is going to do next. The reliability of these candles is more with the higher time frame as it omits the noises on the chart, and we can have a clear picture. If you are a day trader, then you can 30min or 1hr time frame for executing the trade.