It is believed that Japanese candlestick charts were developed by Munehisa Homna, a rice trader from Japan, during the 18thcentury. However, Steve Nison, who introduced them to the Western trading world, thinks that most likely Homna did not use candlestick charts and that they were later developed, during the late 1800s. Whether Homna used or not candlestick charts is of little importance to this strategy, because we are going to focus on a single candlestick – the Pin bar. This is an important and powerful reversal candlestick and if it appears at an important level of Support or Resistance, it can be traded with pretty much confidence. The Pin bar is a candle with a small body and a long wick; the best Pin bar is considered to be a candle where the wick is 2/3 of the whole candle, but other candles are accepted as Pin bars. Here is a picture of a Bearish Pin bar and a Bullish Pin bar:
The Pin bars shown in the picture above have a long wick (much longer than the body) and a small body, with price closing near the highest point of the candle (for the Bullish Pin bar) or near the lowest point of the candle (for a Bearish Pin bar). Now we will focus a little on the psychology behind the development of a Bullish Pin bar: assuming that we are talking about Daily candles, in the first part of the day, the sellers are in control of the market and are able to take price lower, but this strength fades away towards the later parts of the day and the buyers regain control of the market and start to push prices higher and eventually, even manage to close the day higher than it’s opening, resulting in a Pin bar on the Daily chart. This is indicative of the fact that sellers, even though they were strong in the first part of the day, lost the battle and now the buyers are clearly in control. Price will fluctuate during the day and we cannot divide the day in two distinct periods. It doesn’t matter when the buyers took back control of the market (that can even happen in the last hour of the day – although it is not usual). The opposite applies for a Bearish Pin bar.
Like we said, the Pin bar is a strong sign of reversal and we can trade it if several conditions are met. Remember, we are not just trading any Pin bar. When a proper Pin bar is formed we must carefully determine the importance of the level where it was formed. First we must draw Support and Resistance levels and then, if we see a Pin bar forming at one of our previously drawn levels, we must determine if it’s formed in the direction of the trend or counter-trend. Here is a picture to exemplify better:
Although not all of the Pin bars shown in the picture above are perfect, they clearly show rejection from a level of Resistance (or support turned resistance), mark the end of the retracement and are indicative of the continuation of the main trend. This kind of Pin Bar can be traded once the next candle opens, placing a Stop Loss a few pips above the highest point of the Pin for a short trade and a few pips below the lowest point of the Pin for a long trade. Take Profit order must be placed at the next Support or Resistance level. Here is the picture for Stop Loss placement:
Pin Bar strategy summary:
- Determine the trend
- Draw Support and Resistance levels
- Wait for the a retracement to begin (counter trend move)
- If in a downtrend, during the retracement, a Pin Bar appears at a Resistance level, go short
- If in an uptrend, during the retracement, a Pin Bar appears at a Support level, go long
Any trade will be exited if the Stop Loss or Take Profit is hit.
Pin Bar strategy – advantages and disadvantages:
In this strategy we use the pin bar to determine the end of the retracement and the continuation of the main trend; we can say the Pin is a reversal candle for the retracement and a continuation candle for the main trend. It is sometimes difficult for a new trader to understand how one candle can be at the same time a continuation and a reversal sign. This, on top of the fact that the strategy relies heavily on S/R (which needs a trained eye to identify), makes it somewhat difficult for a novice and this constitutes a disadvantage. On the other hand, the Pin Bar strategy gives a high percentage of winning trades if it is used properly. There will be losing trades, but taking only trades with a good R:R ratio, increases the chances of a positive balance.