Peculiarities of identification and trading in the popular pattern
Markets are like people: they lie from time to time. There exist non-verbal signals allowing us to understand whether or not a person is lying, while a chart can give us a hint about the market’s real behaviour. For example, a long upper shadow of a bar says that the bulls’ assault bogged down and the traders should consider selling. The best scenario is when the body of a current bar is placed within the limits of the previous bar. Thus a well-known pattern forms: a pin bar. The name is an abbreviation of “Pinocchio Bar” (we all know the story of Pinocchio, a wooden European boy whose nose grew longer when he was lying).
Bearish and bullish pin bar
Pin bars belong to simple patterns and appear from time to time on any time frame. Their fans think that one should look for perfect patterns that include a long shadow and a narrow body. In case of a bearish pin bar, an entry point for a short position is located below the minimum, or above the maximum in case of a bullish pin bar. There can be some trouble connected with placing stop loss orders as the shadow can sometimes be so long that placing a stop order beyond its limits would mean being doomed to scanty profits. However, the trouble can be settled too.
Pin bars in the AUD/USD daily chart
To my mind, the functions of pin bars vary according to a time frame. If a pattern has appeared in a daily or a weekly time frame, it’s an analytical tool, not a work tool. To use it correctly, we should switch to a shorter time frame and apply the“Two graphic pattern screens” trading system. For example, in case of a bearish pin bar in the daily chart of AUD/USD, a switch to the H1 time frame will allow identifying an efficient reversal formation called “Expanding wedge”. A short position can be opened both at the level of breakout of support 1-3 and the retest level. A stop order shall be placed above the maximum of bar №4.
Expanding wedge in AUD/USD H1 chart
A bullish pin bar in the daily chart of AUD/USD corresponds to the Head and Shoulders pattern in a shorter time frame. Just like in the previous case, a trader can open a long position both at the resistance breakout level in the zone of the neck and at its retest level. As a result, instead of a single entry point, there appear a few points, which provides for some speculation and makes trading more flexible. The targets in the above examples should be determined based on analytical data. Under this scenario, the profit-factor is more likely to grow.
Head and shoulders on AUD/USD H1 time frame
If we look for pin bars in 60-, 30-, 15- or 5-minute charts, their functions will be completely different. It will be a work pattern then. It must produce signals to open positions. The efficiency of pin bars can be increased through a complex analysis of a situation: when combined with other patterns. Particularly, in USD/JPY H1 chart, a bar with a long lower shadow is a component of a more complex graphic configuration - “Wolfe waves”. It emerges in the sweet zone near point 5, which is a weighty argument for opening a long position.
Wolfe waves on USD/JPY H1 time frame
Pin bar on USD/JPY H1 time frame
Simple patterns give a trader the opportunity to combine them not only in the framework of the price/action system, but also with other tools of technical analysis. Pin bars appear to be quite efficient at Fibonacci levels, under divergence conditions identified by use of indicators, and when combined with a market profile or VSA analysis.
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Price chart of AUDUSD in real time mode
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