Pinbar Forex Strategy

Introduction

The pinbar forex strategy is a trade strategy which is based on the directional movement of the pinbar candles in the forex market. Pinbars are single candlesticks which indicate possible market reversals. Due to the fact that they are single candlesticks, the reversal signals are not totally reliable and have to be confirmed using other means of technical analysis. An aspect of this will be shown in this strategy.

For us to understand the strategy, we need to ask ourselves: what are pinbar candlesticks? The following candlesticks are known as pinbar candles:

  1. Bullish pinbars: hammer, dragonfly doji. The longer the shadows of the hammer and dragonfly doji, the more reliable the signals are.
  2. Bearish pinbars: inverted hammer, doji or a shooting star. Longer shadows for the inverted hammer and doji make their price action more reliable.

Indicators

The indicators for the pinbar strategy are:

  1. Pivot point calculator
  2. Coloured MACD indicator
  3. Channel tool

The Pinbar Strategy

Pinbars are candles which signal market reversals, but the signals are not on their own, very accurate. So the essence of the strategy is to combine the inherent reversal power of the pinbars with the two indicators mentioned above to give some form of confirmation to the trade.

One way to achieve this is to use instruments of support and resistance to demarcate areas of price topping and downside reversal on one hand, and bottoming of price and upside reversal on the other hand, to identify possible trade scenarios.

So this strategy is not just about the pinbars; it is also about support and resistance levels. This is why we will be using the following instruments of support and resistance in getting this trade right:

  1. We use the pivot point calculator to define three levels of support (S1, S2 and S3), three resistance levels (R1, R2 and R3) as well as a central pivot. A pivot point calculator is attached here. Click on the link to download it and install it into the Indicators folder of your MT4Build 600 (and newer versions) platform.
  2. Though not a horizontal support/resistance, the parallel trend lines formed by the price channel tool can also serve as some form of support and resistance, with the upper trend line functioning as resistance and lower trend line acting as support.

Short Trade

  • Check to see if any pinbars have formed at the top of a sustained uptrend.
  • Plot the pivot point calculator. If we have any of the bearish pinbars forming at a resistance level, the next step is to go short at the open of the new candle which follows the pin bar.
  • If the MACD histogram is colored red, this adds credence to the short entry.

The following is a 4-hr EURUSD chart which shows an example of a pin bar short trade strategy that utilized the R1 resistance level as defined by the pivot point calculator.

Pinbar_pivot

Chart showing pin bar at support

We see the pinbar forming at the RI, followed by a long candle which broke the centra pivot, with price retracing briefly to this pivot before it finally tanked all the way to the S2 support.

Long Trade

For our long trade example, we showcase the second scenario where we use the price channels as our support-resistance instrument. In this case, we would want to use an ascending channel, as this is the direction of the trend that we want to profit from. The trade parameters are as follows:

  • Use the price channel tool to trace the ascending channel, making sure that at least two highs are touched by the upper trend line, and two price lows are touched by the lower trend line.
  • Check to see that there is a bullish pin bar at the bottom of a period of downtrend. This pinbar should be at the lower trend line of the ascending channel.
  • Go long at the open of the next candle which follows the pin bar. As a rule, the longer the time frame, the more pips can be made from the trade. This trade is illustrated below:

Pinbar_channel

Pinbar short entry setup using channels

Stop Loss

How do you set the stop loss for these trade setups? The good thing here is that both the pivot points and the channel trend lines provide good benchmarks with which to set your stops. For instance, a stop loss can be set above the pivot point where a sell trade is initiated. In our example, this would be above the R1 entry point. For the second example, the stop loss can be set below the lower trend line (long trade) or above the upper trend line (short trade).

Take Profit

For the Take Profit area, the opposing trend line to the one where the trade entry was made is used. For pivot points, the trader must ensure study the price action. Usually, the next pivot point in the direction of the trade move is used. Sometimes, price may advance well beyond that area as shown in our example, in which case, the next available pivot after the one which has been taken out by advancing prices is used.

Conclusion

The pinbar strategy is ideal for short term trades not exceeding four hours. They can be used daily to good effect. It is suggested that the trades are practiced on demo before they are applied to a live account.

Leave a Reply