The formation of a pin bar is in fact a trend reversal which consists of 3 bars. The term “Pin Bar” is an abbreviation of the term “Pinocchio Bar”. Let’s take a look at how a pin bar is formed and how we can make money from it in the forex market.
What is a pin bar?
To be precise, a pin bar is the middle bar in a three-bar formation which can be found in a bar chart or a candlestick charts. Typically, traders tend to prefer the candlestick chart version, which is considered to be visually superior for observing price action, however, we will initially discuss the formation of pin bars on a standard bar chart.
Characteristics of a pin bar formation
The opening and closing of a pin bar are very close to each other and near one end of the bar. The wick of the pin bar sticks out far beyond both bars 1 and 3. The longer the wick is, the better the quality of the formation.
Examples of pin bar formations
Here is a daily chart of USD/JPY currency pair, we see many pin bar formations that work very well.
EUR/USD Daily chart
Below is a daily chart of the USD/CAD currency pair. After a 3-week bullish streak, we see a perfect pin bar formation which leads to a significant trend reversal.
Here is an example of a trending bull market where several profitable pin bar configurations appear. The following EUR/USD daily chart shows that pin bars that are taken along with the dominant trend can be very accurate and rewarding.
How to trade a pin bar formation
To trade a pin bar correctly, you must first make sure that it is well defined (see the above description).
Then, try to only trade pin bars that are in agreement with another signal. In general, pin bars that are traded in agreement with a dominant trend are the best. Nevertheless, there are many profitable pin bars that occur within markets that are in a tight range or at major trend reversal levels. Also, try to combine the pin bar formation with support and resistance levels, trend lines, Fibonacci retracement levels or moving averages.
A pin bar formation is a trend reversal setup, so for a bearish bin bar formation such as the one featured in the small picture above, we will sell once the pin bar’s low has been broken through and we will put a stop loss 1 pip above the pin bar’s wick. And for a bullish pin bar formation, we’ll buy a break above the pin bar with a stop loss 1 pip below the pin bar’s low.
Pin bar formations with candlesticks
The formation of pin bars with candlestick charts is pretty much the same except for the terms that are used, which are slightly different. A bearish trend reversal represented by the formation of a pin bar can be referred to as an inverted hammer, a doji, a tombstone, or a shooting star. A bullish trend reversal with a pin bar formation can be called a hammer, a doji or a doji dragon.
Pin bar formations can be a very profitable tool in your arsenal of forex trading setups. The best pin bars setups are those that are in confluence with other signals such as support and resistance levels, the confirmation of a dominant trend, or other confirming signals. Look for pin bar formations that match all of the characteristics listed on this page, leaving aside those you don’t trust. Pin bars work in all timeframes, but they are especially effective on 4-hour, daily and weekly charts.