Pin Bar Trading Strategy
Hello traders! Welcome to the Price Action Course and the six module Price Action Strategies.
In this lesson, I’m going to teach you the pin bar strategy. We are going to use this strategy to either trade with a trend after a corrective swing within a defined structure, or whenever prices reach a strong level of supply or demand and we can counter-trend trade. So let’s start by defining this strategy.
The pin bar strategy is one of the most powerful price action counter trend trading set-ups. The reason this candlestick formation is so powerful is because it shows exhaustion and rejection at key levels.
Pin bars have small bodies and long wicks. The wicks are always pointing to the direction of the trend, which means that the pressure that was running price either up or down is thinning down. Technically speaking, price tried to break with a level but was unable to do so, and price returned to its previous levels. And this means, for example, if we are in an up-move or a corrective up-move within a down structure and we reach a very strong level of resistance and price tries to break it but is unable to do so, we are going to have printed a candle with a small body below the level of resistance and a long wick that breaks through it.
And this means that buyers having counter sellers or heavy sellers at that level took control of the market. So we have a set-up to go short at the end of that corrective move. This leaves a candlestick with a long wick at the end of a move that signals either exhaustion or rejection.
The pin bar strategy must be used with supply or demand levels, and it works better on the higher time frames. Of course you can use these pin bar strategies to scalp the markets on the fifty-minute charts. The reason you can do it is because if you define a structure and you define corrective strings and if a pin bar prints at the end of a corrective move at a key level, you have a set-up. But remember that pin bars work better on the higher time frames because the higher time frames is where you can find the real levels of supply and demand.
So this is what a pin bar looks like, guys. The idea of this strategy is to capitalize on reversals at key levels after a corrective string. The first step is to analyze the structure of the market, whether we are in an up-cycle or a down-cycle. The second step is to spot the corrective moves using market flow analysis. This means that we are going to measure each swing and each projection to also know if we still have momentum of a removal. The third step is to spot key support and resistant levels and wait for price to hit them. And once a pin bar prints at a key level on a corrective move, we can trade in the direction of the trend.
And the second way we can use the pin bar strategy is when counter trend trading at swing highs and swing lows. When price hits important levels of supply or demand and a pin bar prints, we can counter trend trade with this set-up. So right now we are going to go to a GBP USD forward chart, and we’re going to do an analysis and look for spots where we could have had a pin bar set-ups in past price action.
Okay traders, so this is the GBP USD forward chart, and we are going to start with the breakout of an up-structure. Now what we are going to do here is we are going to start by defining the actual down-structure that is in play right now. So what we are going to do is just draw a channel or a down-channel that is in play right now. As you can see, we are in a down-structure, and we are going to measure the first downswing.
The first downswing is about 600. Well, it is exactly 592 pips. The corrective swing is quite dipped. As you can see, it’s almost a one-to-one swing low to corrective stream because we have a 469 pip swing low. Right here, you can see that we do have what seems to be like a pin bar rejection of this area.
Well, the second thing we are going to do after we have the first swing low and the first corrective move, we can draw the channel. Once the channel is drawn, we can look for levels that price might test when it corrects to the upside. And you can see that we do have here some correct. Well, this is what seems to be like a very strong level of resistance and then tested as support. So this is the first level we are going to look at after the second swing to the downside.
And the second swing to the downside ends right here for about the same amount of pips. We have a swing to the downside of about 571 pips. And then after the second string, we can start to look for pin bar formations at key levels. And right here, you can the price corrects to the upside and we have a pin bar formed when price tests this area of resistance.
So I’m going to draw a rectangle right at the pin bar, and what I’m going to do is I’m going to show you where the actual stop loss should have gone. The stop loss should have gone above this area of resistance because if price breaks to the upside and breaks with this area of resistance, it is very likely that is going to test the trend line again. But if it doesn’t, after the pin bar, price is very likely to go down, and our target area should go at this swing low.
Before we take the trade, we have to measure, and we have to calculate the risk-to-reward ratio. And our answer should go right here after the pin bar is formed, so we are risking about 100 pips on this trade for a possible reward of 230 pips. So it’s better than a 1:2 risk to reward ratio, so it’s a very good trade to take. And after the pin bar forms, you can see that price never goes up, and that we immediately start going down, and the levels that we picked as our targets are hit.
So this is what you’re going to do, let me sum up all of the steps that we have gone through to take this trade.
First of all, we defined the structure. We are in a down structure. Then we calculated the swing lows to the swing highs to see the next area where price is likely to correct to the upside. When we spotted the previous levels of support and resistance, the price is likely to test on a corrective move. When price tests these levels and a pin bar forms, we have a set-up, but we also have to calculate the risk-to-reward ratio. And if it’s better than a 1:2 or . . . depends on your actual trading strategy or money managements rules, but here we have a 1:2, better than a 1:2, risk-to-reward ratio, so we take the trade and our targets are hit. And we can continue to look for further set-ups with the pin bar strategy.
Now that we have taken profit at a 230 pip trade, we are going to look for another opportunity on a pin bar set-up. You can see that here is a very interesting area of support. Price tested it here. We broke it when we took the trade, but price moved to the upside immediately. Then we tested it again, and we broke to the downside. Now we are just waiting for a pin bar confirmation of a new set-up to a downside. And here you can see that price tests, the channel support, and starts to move up. And we tested it again, and starts to move up.
Now what we are going to do is we are going to define new levels of support and resistance. Right here we have one, and right here we have another one. And you can see that price actually respects these levels a lot. And when price comes right here and tests this level of previous support as resistance, you can see that a pin bar forms. And right here we have a new pin bar set-up when this pin bar forms.
You have to be careful on how to choose your stop loss levels. And right here you should always use at least 10 pips above the actual area of resistance because you can see at right here price breaks with this area of resistance, but then closes below it. This looks like a stop run, and a stop run is when big money comes and takes out the stops of retail traders. So you have to be very careful with it.
Right now, I’m going to show you where you should have put your stop losses. Right here, like 10 pips above the actual area of resistance, and your targets should go right here at the next area of support. And we’re going to calculate the risk-to-reward ratio. We are risking here 46 pips or 50 pips, which is very good, a very small risk so you can take out a bigger position for 175 pips. So this is a better than 1:3 risk to reward ratio. And once again, you can see that price comes, boom, and hits our targets to the pip.
So we can start to look for new short positions or new short set-ups with the pin bar strategy. But also we are going to use order flow analysis to see if this market is still moving or still has downside potential. And you can see, that the corrective swings are way . . .the projective swings are way bigger than the corrective swings, so we still have a very strong potential to a downside on this market, so we are short opportunities.
And right here you can see the price breaks with the previous area of support, and a pin bar forms. And this is a very nice set-up because it’s what we call a KYM set-up, a Kiss Your Mama. And I didn’t invent this term, but what it means is that price breaks with the level and then “kisses” it back just to test it as resistance.
And right here we have another pin bar. And you can see that the risk on this trade is about 60 pips for a reward of . . . and because we don’t have any levels to the downside here, we are going to use the trend line or the channel’s support as a target. And we have 252 pips, so it’s almost a 1:5 risk-to-reward ratio on this trade.
And this is how you are going to trade with the pin bar strategy. And as you can see, when pin bars form on the forward chart, they are very powerful set-ups to follow.