Bullish and Bearish Pin Bar Patterns guideline (PDF)
A pin bar reversal is a Japanese pattern with a small body and a long wick on one side of it. Hence, the forex structure shows that a rejection has occurred at a certain price point in the forex exchange. Moreover, there are bullish and bearish pin bar formations in the forex and crypto markets. Basically, candlestick trading was invented by the famous Japanese rice trader, Munehisa Homma, in the 18th century. This genius trader believed that market sentiment and human psychology are the primary drivers of the price movement. That is why he graphically represented this through candlestick formations. In short, the pin bar candlestick offers chartists great insights into the psychology of the current market that would push the price activity in one direction. Today’s topic will examine the Pinocchio candle strategy in the context of changing market circumstances.
What is pin bar pattern ?A pin bar is a reversal forex pattern formation that frequently arises on candlestick charts. The candlestick has a small body and a long candlewick and another short wick in the opposite direction of the extended candlewick. On the one hand, the candle looks like a pin or a needle. On the other hand, it pinpoints the “Pinocchio” Bar abbreviation from the “Technical Analysis Explained” book by Martin Pring. To explain, the long shadow of the bar looks like Pinocchio’s nose. This is where the nomination comes from. So, the taller this shadow the more likely and the stronger the reversal.
Price action traders seek to identify these structures, widespread in the foreign exchange, in order to have a clear visual representation of the price activity on forex charts. Because the long shadow implicitly shows a price rejection area that may cause a reversal in the opposite direction which is pointing to. Thus, the bullish pin bar has a large lower wick, revealing a rejection of lower price grades and near price progress. In other words, this may highlight a supporting grade. Conversely, the bearish pin bar has a long higher shadow, revealing a rejection of superior price grades and a near drop in the price activity. That is to say, a resistance area may arise on the forex chart.
Consequently, forex traders could be ready to trade counter the preceding trend direction when these patterns arise in the foreign exchange as trading opportunities to discover potential rejection zones and to catch reverses in the price movement.
How does the pin bar candlestick form?
The pin bar candlestick forms by pushing in the direction of the trend initially, which gives the first impression that the move will continue and persist with strength. Yet, an opposite pressure arises and drives the candle to close near its opening, resulting in the long candlewick. So, before closing and forming, the candlewick of the pin bar pattern was initially part of the body of the candlestick. That is why cryptocurrency traders often interpret the shadow of the formation as a price rejection area, where the majority of market players have rejected prices from breaking particular grades.
How do you identify Pin bar Candle ?Identifying pin bar formations on the chart is simple as the large wick must measure at least 66% of the whole candlestick. In other words, the size of the real body is less than 1/3 of the entire candle. The reputation of this pattern has attracted many forex traders to employ a programmed scanner on their MetaTrader platforms in order to quickly and automatically spot bearish and bullish pin bar candlesticks on their trading charts.
After prolonged bullish movements, traders seek candlesticks with long candlewicks in order to trade accurate pin bars. The forex chart below displays a bearish Pinocchio structure on the GBPJPY chart. First, the trend began upwards before the formation builds. Then it reversed at the end of the bullish trend as the price action created a bearish pin bar candlestick. As a consequence, the price changed its direction and started falling down considerably. Hence, the sticking out of the bar’s candlewick above the recent price action confirms the bearish reversal occurrence.
How to trade pin bar reversal ?Generally, pin bar reversal trading works better with long timeframes in the foreign exchange such as H1, H4, D1, and W1. To explain, their reliability collapses with shorter timeframes. Because candlestick formations are widespread in the forex market and are more reliable over the long term. Hence, the first setup resides in choosing your preferred currency pair along with the timeframe that makes your trading more comfortable on the chart. After doing so, the second setup concerns when to enter the market and where to place the stop-loss order.
Bearish Pin bar example
A Bearish Pin bar is a Japanese candlestick that is distinguished by its long upper tail. The black version of the bearish Pinocchio is generally more accurate than the white one. The rationale behind the Bearish Pin Bar is that the trading instrument has advanced too much through the time period of the pattern. But then closed the session right back to where it started. Therefore, this highlights a bearish reverse in the price action next to the pin bar formation and also that sellers have quickly taken control of sellers during the timeframe.
Bullish pin bar example
The market shoots higher after a bullish Pin bar candlestick that is characterized by its long lower wick. The green version of the bullish Pinocchio is naturally more reliable than the red one. The logic behind the Bullish Pin Bar is that the financial asset has dropped considerably during the timeframe of the candlestick. Then finally closed the day straight back where it started. Consequently, this intimates a bullish reverse in the price activity following the pin bar formation and that bulls have quickly taken control of bears during the time period also.
Pin Bar Trading Setup Explained
Entry setup on pin bars
Once traders spot a correct pin bar formation on their currency chart, they could enter the trade. On the one hand, currency traders choose to long the forex pair at the first candle that closes beyond the smallish candlewick of the bullish pin bar. Alternatively, they decide to short the currency pair below at the first candle that closes downer the small wick of the bearish version of the candlestick. On the other hand, other traders opt to set a market order at between 10 and 20 pips downer the close price of the bearish pin bar candlestick to confirm the trend reversal. Alternatively, between 10 and 20 pips beyond the close price for the bearish counterparty.
The stop loss has better be placed at the end of the longer candlewick of the pin bar for both bullish and bearish patterns. Because a strong price rejection just occurred near this grade. To explain, this supporting or resisting grade will likely persist if the volatility increases. However, the formation is likely to fail if it is broken.
The EURUSD chart below illustrates a bullish pin bar set-up of the reversal candlestick. A long entry is undertaken at 1.1782 which corresponds to the closing of the candlestick that follows the bullish formation of the Pinocchio bar. This entry price is more than 10 pips beyond the bar’s close of 1.1535 as we discussed before. Concerning the stop order, it can be placed at 1.1408 which is the bottom of the lower candlewick of the forex formation.
Pin bar patterns are critical technical analysis tools for forex and crypto traders. This price action trading is considered one of the most accurate strategies to predict market reverses. To clarify, this single candlestick formation is extremely easy to spot and identify at the same time. That is why currency traders should include this pin bar reversal pattern on their forex charts. Note that there are other diverse nominations for the Pinocchio candle. To explain, many long-wicked candlesticks refer to this pattern. Also, they are almost traded in the same way and logic. For example, we cite the long-wicked “Dragonfly & Gravestone” formations.