Forex Trading: Price Action Strategy With Pin Bars
Among the multitude of forex strategies, the price action is probably our favorite one. However, despite being one of the simplest and straight forward strategy, it is not the most popular choice among traders.
The Price Action strategy is, in fact, the study of the price movement. So its main peculiarity is that it could be used without the need of indicators and oscillators as it is basically immune to the noise produced by those indicators as well as by macro-economic data. So when the trader decides to stick to the price action strategy, the price is the only focus, nothing else (or almost) counts.
Advantages of the price action
As we said earlier, the main advantage of this strategy that catches your attention at first is its simplicity. It is not required to know how indicators and oscillators work and the maths behind them to interpret a sell or buy signal. But as this makes it an “open to all strategy”, it is also true that such a strategy requires a certain knowledge on how to read the financial charts.
However, once you will start mastering it, you will be able to achieve good profits in the long run. Moreover, the price action strategy is considered an “universal strategy” that applies to any financial asset: forex, stock, crypto etc. etc.
The price action strategy usually requires a daily timeframe, which means less stress for the trader compared to other strategies such as, for instance, the scalping.
Anyway, there are traders that use the price action strategy with shorter timeframes for intraday operations. The flexibility of this strategy allows to apply it to different trading styles without big issues.
How to use the Price Action strategy
The price action strategy implies the analysis and the study of the price movement. In order to do so, it is recommended to use the charts with Japanese candles that allow a better analysis of the price changes. With this kind of graphs, we will be looking for the so called “pin bars”. The pin bars are typical Japanese candles that represent either a Bullish or a Bearish signal. But there are not only the pin bars: thanks to the Japanese candles it is also possible to determine a certain pattern for that asset.
Here below there are examples of pin bars: as you will notice, the body is much smaller of its shadow (thin part of the candle or “tail”).
As general rule, a pin bar should have a shadow that is at least 2/3 of the complete candle length.
The body of the candle (or “real body”) should be 1/3 of the candle length, that is the length of the tail plus the length of the real body.
These pin bars are considered “reversal signals” of the present trend. The strategy is based on the fact that an extension of the shadow in either direction means a weakening of the existing trend as there is not enough strength on the price to keep that direction, and either the bullies (in case we are in the presence of a downtrend) or the bears (in case of uptrend) have taken control and have rejected that price level. With that said:
- We have a sell signal when we are in an uptrend and a bearish pin bar appears on our chart (see figure above). The strength of the uptrend seems vanishing and the market seems ready to bounce back and to take a downtrend instead;
- We have a buy signal when we are in a downtrend and a bullish pin bar appears on our chart (see figure above). The strength of the downtrend seems vanishing and the market seems ready to bounce back and to take an uptrend instead.
These signals are stronger when they happen in the presence of important levels (supports and resistances) as it means that the price was already pushed away from that level in the past (see the figure below). In the example we are in an uptrend (after a downtrend) and on the chart a bearish pin bar has formed. As additional information, we notice that the pin bar has formed in the proximity of an important resistance which was created when the previous downtrend started. This is a very reliable signal and in fact a new downtrend begins.
However, the pin bars can be used in different ways in order to get even stronger signals. In the other example below, we are in the presence of a double pin bar. These are 2 uptrend pin bars that have formed at the same price level which becomes now a support. In this way we have a further confirmation of the buy signal that makes our trade even safer.
The pin bar can also represent a continuation of the existing trend as shown in the figure below, especially in the presence of a strong trend. In this example there are some retracements and one of them is our bullish pin bar.
Suggestions for the Price Action strategy with pin bar candles
In conclusion, here are some important recommendations that will help you to correctly read the pin bars:
- The strategy works better with daily timeframes as the signal is normally stronger and the noise due to macro-economic data is pretty much reduced;
- The longer is the shadow of the pin bar the higher is the possibility that the reversal signal is valid. This is even better when the pin bar is close either to a resistance or to a support level;
- Although being often more profitable, for a less experienced trader it might result more difficult to find a reversal signal with the price action strategy. It could be easier to spot those ones that represent a continuation of an existing trend, also in consideration of the concept that “the trend is your friend”.
You can try this strategy by opening a demo account with our partner AvaTrade through the banner on this webpage.
Any comments to this post are welcome.
In the next article we will make some examples on how to place Stop Loss and Take Profit levels and how to enter the market with Buy and Sell Limits and Buy and Sell Stops
Thanks for your attention!
The Lucidix4forex Team