Price Action: Pin Bars
As we discussed in our last article in regards to price action, traders can potentially use the price chart itself, devoid of any indicators to make trading decisions.
There are numerous price action mechanisms that traders use in attempt to get the odds on their side as well as possible.
One of the more desired conditions that traders can look for are short-term reversals in price. Candlesticks themselves can help us see some of these potential reversals, with the Pin Bar.
Pin bars, which are short for ‘Pinocchio,’ bars, attempt to find candle wicks that ‘stick out,’ from price action in an effort to capitalize on particularly volatile market conditions.
To get deeper in a pin bar, lets first examine candles and candle wicks in closer detail with the picture below.
In the candle displayed above, drawn inside the rectangle, notice that this would be a decline in price as the currency pair closed at a lower value than it had opened. The difference between the open and close is often referred to as the ‘candle body.’ The skinny area above and below the candle body are commonly referred to as ‘wicks.’
Also notice that price actually proved quite volatile during this period, and this can be seen from the ‘wicks,’ of the candles. Although this candle shows price moving lower from the open to the close, the wicks can show the astute trader that price had actually climbed at one point! This can be seen from the wick atop the candle.
As price was moving higher than the candle open at the time, this would have appeared as a ‘bullish,’ candle. But that was a temporary movement as negative momentum came back in the pair only to push price lower; much lower in fact. So low that price actually began increasing, exhibiting that the pair may have been oversold.
When the candle completes, we have a long wick that ‘sticks out,’ from price action. This is the pin bar:
When the trader notices the pin bar, they can imagine the price action that had driven price higher may potentially continue into the next candle.
Traders can potentially look to go long in the above setup, looking to play on the strength that had driven price off the low values in the pin bar.
Now, it is important to keep in mind that not all Pin Bars can be identified as ‘tradeable,’ opportunities. By nature, trading on pin bars are ‘counter,’ to current price action exhibited.
In the below setup, please take a look at what is happening leading up to the pin bar that forms:
Before the pin bar forms, price has made a fast move to the downside, which some traders may construe as a downtrend. Opening a long position would be going in exactly the opposite direction, which could potentially prove costly.
With Pin Bars, its important to add other areas of price action or technical analysis to further confirm the entry into the trade. This is where trading in the direction of the trend, or trading with Support and Resistance can come in handy. Luckily for the price action trader, much of this can be identified directly off the chart without the need of any additional indicators or strategies!
Links to additional resources:
--- Written by James B. Stanley
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