Pin Bars – My First Successful Trading Strategy
About a month ago we introduced the idea of Pin Bars – the chart pattern that ‘lies’ to you.
That sparked a few emails and comments asking if we could explore it further.
So today I want to show you some more details on how to trade Pin Bars. And we’ll look at some possible set-up options to try.
I’ll talk a bit about stops, entries and targets a little later. But first, I want to connect a few dots for you by looking at how you can use Pin Bars in conjunction with other indicators.
By the way, that’s an important point. With any pattern set-up the key is to look for complementary signals…
Using Pin Bars with our three essential indicators
I don’t mean that if you want to go short, you need to find three other indicators that point to short signals as well.
What I mean is you should set the indicators you will use for confirmation. Then, when they all align, you can place a trade. It’s a subtle difference.
Yes, I realise these two sentences sound similar. But they are very different in their application.
With Pin Bars there are some nice applications you can use and they work well with the indicators I described in our report, Three Essential Forex Indicators (And How You Can Make Money With Them).
[You mean you’ve not seen that report? Well, be sure to read it soon. A lot of what we cover in Forex Round-Up ties nicely in with those three indicators. So just enter your email address below to join Forex Round Up free and get instant access the report.]
Right, let’s look at some of those indicators now to see how they can work with Pin Bars…
First up, the Relative Strength Index or RSI.
The first thing I want to point out here is that Pin Bars at extremes in the RSI can often be misleading. They’re normally caused as price is starting to chop around or order books are light.
Let’s imagine we’re in a down trend. If you get a Pin Bar pointing for short entries in an Oversold RSI situation then this is less likely to play out.
However, if you get a large Pin Bar (remember, it needs to be really obvious) pointing in a Long entry direction, then this does have a higher chance to play out.
I’ll show you what I mean on some charts…
The opposite is true in Overbought RSI regions.
Similarly, Pin Bars aligning to Stochastics and MAC-D (i.e. in the same direction as their trends), have a higher probability of playing out.
And using exponential moving averages (EMAs) also works well with Pin Bars, either as dynamic support and resistance levels or to support the trend direction of the play.
Have a look at the next chart to see what I mean. The red and green lines are the EMAs.
See how the EMAs are acting as Dynamic support and resistance. Price bounces off them from above and below.
The numerous Pin Bars caused by price rejections of higher prices off these levels give us a good clue to the move lower.
The point is that using the indicators I’ve covered before (RSI, EMAs, stochastics and MAC-D) as confirmation can make your Pin Bar trading strategy more accurate.
Ok, so that was a quick pointer into building up your trading plan if you intend to use Pin Bars.
Now let’s take a look at stop placement and entry points. And after that, we’ll think about targets…
My rule of thumb for Pin Bar stops
Let’s start with stops, as when I am using Pin Bars I tend to keep this as a pretty standard placement.
Having said that, I will watch for round numbers and key levels to ensure I am protected from any stop hunting.
I can give you my general rule of thumb, though.
Take a look at this Bullish Candle. Remember, here the price has reversed from the low (bottom of the candle) to close above the open.
If entering a long position here, my stop goes at a distance below the low of the Candle equal to the candle Body plus the head. I’ve shown that here:
For a Bearish Candle I simply do the reverse.
So that’s how I tend to treat my stop loss on Pin Bar trades.
For entry points I really have three potential areas I look at on the chart.
The ideal entry will be around 50% of the total candle height. However, this requires a failed retracement and therefore it won’t always be possible to get this.
Therefore entry at the candle close should be possible, especially if you trade these at night when the New York close happens and therefore we get the roll over in FX (i.e. it’s when daily candlesticks close).
The one instance where I will take a deferred entry is if we have a key level at the nose of the candle.
In the example below I’m assuming a strong resistance line above my Bullish Pin Bar. Here I will wait for a break of that level to enter long.
OK, so we’ve looked at stop losses and entry points. Now let’s think about when to take our money off the table in winning trades…
Knowing when to take profits
My targets on these plays will be simple.
I will be looking for 2:1 risk reward for at least 2/3rds of the position.
Recapping back on my risk/ reward article that simply means I work out the difference in pips between my stop loss and entry point. I’m aiming for two times this figure as my initial profit target.
On my charts I will mark T1, T2, T3 where T1 is 1 times my stop loss distance, T2 is 2 times my stop loss distance and T3 is 3 times my stop loss distance.
My rules for trading are then simple. At T2 I will take off at least 2/3rds of the position. I will then let the remaining part of the trade run and move my stop loss up to the T1 level.
Every time the trade moves past a key support level (think of the major pivots) or it hits another target multiple, i.e. T3, I will move the stop loss up one level, thus manually trailing my stop.
So there you have it. If you’ve been reading FRU articles carefully, you now have all the components for a viable trading strategy.
This is a basic version of a strategy I’ve personally used to great effect. In fact, it was one of my first really successful strategies that made me a profitable trader.
So have a play around with combinations of technical indicators to help you find good Pin Bar entries.
By the way, we’re looking into starting up a Forex Round-Up ‘live trading room’ for you.
It would be somewhere you can discuss these set-ups with other readers, share your experiences and help each other. And occasionally, as my time allows, I’ll pop in to give you some of my thoughts and answer your questions. Sound good?
We still have some work to do on that, but we’ll keep you posted.
In the meantime, if you have any questions or feedback on today’s issue or FRU in general, as normal do please leave a comment below.