A beginner trader in forex would be best advised to learn a
simple mechanical system and stick with it until he masters it. One of the best
mechanical systems would be to learn price patterns in charts. This is purely a
price action method so the reliability is much higher compared with an
indicator laden system. This is not to shoot down indicators that has a place
in the trader's arsenal but that stage comes after the trader has somewhat mastered
the art of trading and uses the indicator as a confirmation for his entry /
exit. A newbie would be prone to using the indicators as an entry signal
instead of as a secondary confirmation tool. The result will be a blown account
and shattered confidence because we all know indicators are lagging behind
price for the most part. So which mechanical system is more suitable for the
newbie trader? There is one called the Pin Bar, short for "Pinocchio
Bar" which was first coined by Martin J. Pring who is a leader in the
global investment community and also an author of many books on Technical
Analysis. This is in my opinion, one of the
most powerful price patterns in trading. When this Pin Bar is played
according to its proper rules, it has a reliability of more than 90% success
What makes a valid Pin Bar?
A Pin Bar looks similar to a Shooting Star or a Hanging Man
or even a Dragonfly Doji but there are a few characteristics to the Pin Bar that sets it apart from the rest. Below
are some of its characteristics;
1. It must be present
at a swing high or swing low points only because it is a reversal bar.
2. It must have a real
body that is not more than 25% of its full range that includes the shadow.
3. It must have its
real body within the prior bar.
4. The nose or the
long shadow must have a decent length; the longer it is the more powerful.
It is best to not enter a trade blindly by trading anything
that looks like a Pin Bar, more so when it shows up in the middle of a sideways
market. Always be patient in waiting for the best setup to occur and when one
occurs in the direction of the main trend, especially at the end of a
retracement, chances are extremely high for a successful trade (as can be seen
from the chart example above). It just took off like a powerful rocket! This one
gave an easy 5 or 6 times the risk to reward ratio. If you had risked 2% of your account, you made a cool 10% - 12% gain just from this one trade. Most hedge funds and professional traders will be very happy to make 10% - 12% returns a year and you just made that in a single trade! If that is not power, then I don't know what is. You can find this pattern repeating fairly consistent in chart after chart in any markets.
What time frame to trade?
Now not all Pin Bars are created equal. Although this price
pattern has a very high probability of success, you will find that the lower
the time-frame that you delve into, the lesser it’s reliability. This is of
course, not just true for this Pin Bar method alone but just about any strategy
will be weaker in their lower time frames compared with the higher time frames.
New traders are recommended to trade only
the Daily time frames while the experienced ones could trade the 4H charts.
It takes more skills and more decision-making ability to trade the 4H Pin Bars
or lower due to its inherent ‘noise’ which are erratic movement that whipsaws
up and down dangerously. The higher the time-frame, the higher the reliability
and the better your chances for success.
How to trade a Pin Bar?
Entry is at the break of the Pin Bar i.e. below the low end
of the bar or its shadow if it has one. Stop Loss goes above the long nose for
a fixed % of risk. If the top of the Pin Bar is 100 pips from the entry which
is at the base of the bar and if you are risking 2% of your $10,000 account. Then
your risk is $200 / 100 pips which gives a position size of 2 mini contracts or
20 micro contracts. Always define your risk in advance. Know where your Stop Loss (SL) level is
before you put on the trade. Take Profit (TP) level is up to your judgment. My own
strategy is to take the first half position at 1R level and let the 2nd
position ride to the next Support / Resistance level while the SL moved to Break Even (BE). Beginning traders could take full profits at
either 1R or one-half at 1R and one-half at 2R, whichever they are comfortable
with while they are learning this strategy.
Example from the above entry;
You have 2 position sizes @ 1% each for a total risk of 2%,
with a Take Profit at 1R and 2R respectively.
When the 1st TP is hit, your gain is 1% which is $100.
When the 2nd TP is hit, your gain is 2% which is $200.
Therefore, your total gain for both positions is 1% + 2% =
3% which is $300.
Risking 2% and gaining 3% is not bad for a start, which is 1:
1.5 risk to reward ratio. As you get good at this, your risk could be increased
and you could aim for 3 take profit levels therefore increasing your risk to
reward ratio to 1: 2 or even 1: 3. But go
slowly in a step-by-step fashion while building confidence in this Pin Bar
The advantages of trading the Pin Bars;
is one of the most easiest to spot in charts
due to its unique appearance.
is fairly regular in its occurrence
so you will not be “missing the action” that every trader craves especially new
traders. Nonetheless it is highly advisable to be picky and choosy in choosing
the best setups.
has a very high probability of success.
The reason is that the Pin Bar actually reveals the market sentiment of a
“violent rejection” of high or low prices that tends to not only reverse the
earlier price direction, it tends to resonate and continue in the reversed
direction for a significant distance or time period. It reveals the market
psychology of the masses and for this reason it tends to repeat itself again
entry and exit is straight-forward,
so the guesswork is taken out. It is a purely mechanical system that is highly
A personal note to my readers;
Based on my own experience, it is advisable to trade Pin Bars with the
direction of the main trend and not against it. This is not to say that you
cannot ever trade Pin Bars against the trend, but if you are just starting out,
counter-trend trades are risky. Look for an established trend that is either up
or down, and then look for a retracement either to the 50% Fib or even 61.8%
Fib levels. If a Pin Bar forms, you now have a very high probability setup.
Even though its high probability, it is NEVER a guaranteed outcome as anything
can happen in the market. You should
always remember that trading the markets is a probabilities game and there are
no guarantees. Therefore, it is advised to observe proper money management
and if you are starting out, adopt a sound risk exposure i.e. 1% or 2%. Slowly
increase it as you gain confidence but don’t ever go beyond 3%. Even the
greatest strategy in the world will cause you to fail if you abandoned money
management. With all these in place first,
only then this Pin Bar strategy will be the most effective tool you could use
to trade your way to riches. You now have in your hands one of the simplest and most powerful
trading systems you can ever find in trading. What you do with it or how
you use it to your own advantage and gain lies in your own hands. Good trading!