This members’ lesson is going to discuss some of the differences between good and bad pin bars. Now, the first thing to understand here is that there IS some discretion involved in price action trading, so you will need to take what is discussed in this lesson as "guidelines" instead of "strict rules", because market conditions are dynamic and constantly changing. This lesson is meant as a more of a general guide of some things you should look for in pin bar setups and how to avoid pin bars that are perhaps lower-probability.
Don’t try to get into a game of making strict rules for what a pin bar needs to have, because every pin bar is different and the market context (surrounding price action) that they occur in will be different. It is up to you as a price action trader to use your discretion, which comes from experience and screen time, to decide which pin bars to take and which to stay on the sidelines for. Hopefully, through this lesson, I can share with you some of my experience and therefore help you develop and grow your own skill in determining which pins to trade and which to avoid…
Example 1:
In the chart below, we are looking at a few different pin bars that formed in the EURUSD in recent months. The first were two pin bars that formed back in mid-July and whilst they were smaller pin bars, they had some very positive things going for them, which will discuss below. The last pin, was a daily chart pin bar setup that formed back on August 22nd as the market was still moving higher. While this pin bar may have looked like a valid pin bar setup that was in-line with the recent bullish momentum / uptrend, it had a few major flaws as discussed below:
The most obvious problem with the August 22nd pin was that a very key / strong resistance level was sitting very close overhead up around 1.3400. Really, there was a key resistance zone from about 1.3400 to 1.3450. Now, the obvious implication here is that we don’t want to buy into resistance. However, and this is a big “however”, many traders take this too far and they go out and find every little level they can find on their charts and get frustrated and paralyzed by over-analysis because they think every little level is going to cause a trade to potentially fail.
Here’s the distinction you need to make in situations where you have a pin bar (or other PA setup) just below or above what you think is an important level of support or resistance that might hurt the trade’s risk / reward potential. You need to ask yourself if the level is a “key” level or a minor level? In the chart above, 1.3400 – 1.3450 was CLEARLY a key resistance level BECAUSE it caused price to make a significant directional change back in June, in fact it actually changed the trend at the time from up to down.
One thing you need to understand is that not all levels are equally significant. A level that has caused a major directional change, meaning at least a near-term trend change of about 2 weeks or a month, is a key level. Also, the more recent the level, the more significant. So a level from a month ago is much more important than one from 2 years ago.
Note, the minor resistance level on the chart above and that price rocketed right up through it following the pin bar that formed on July 18th. That pin bar had fresh and very strong, bullish momentum behind it and no "key resistance levels" standing in its way. Now, I know you can look back at that minor resistance near 1.3175 and see that back in April and May it may have been considered a “key” resistance at the time because it did contain price for a while and caused it to move significantly lower for almost two weeks. But, we need to also consider that after that, price came roaring back and easily busted up through that same level in early June, which clearly tells us that its significance as a key resistance level was hence diminished. These are some of the “finer” aspects of analyzing levels and price action that take some time to figure out, which hopefully these members-only articles are helping you with.
Remember this:
In an uptrend, minor resistance levels will often break with the trend, so don’t be afraid of taking a good confluent setup only because a minor resistance level is close overhead. If there’s a KEY resistance level, as described above, be much more cautious and consider not entering until the market decides if it wants to break up above the level or retrace lower. (Opposite for downtrend, obviously)
To summarize the above point about levels:
Uptrend – minor resistance will often break with trend, but be very careful at key resistance and consider sitting out.
Downtrend – minor support will often break with trend, but be very careful at key support and consider sitting out.
Example 2:
In the second example chart below, we are looking at two pin bars that formed in the GBPUSD back in August. The first pin bar from August would have resulted in a loss if you entered at market shortly after the close or on a 50% retrace (if you waited for a break of the high you would have avoided the loss). The second pin bar led to the most recent surge higher in the GBPUSD, and it was quite a significant up move that I know many of you profited on.
There are a couple of important things I want to touch on about these two pin bars. First, let’s talk about the failed pin bar...
The failed pin bar from August 27th was one that I know got some discussion in the forum and that some of you traded, for a loss most likely. The key thing to understand here is that the downside retrace was not over when this pin bar formed, and then the market retraced a little bit lower and actually hit the support level at 1.5425 before forming the second, profitable pin bar.
I know it can be difficult and it will result in you missing some good trades sometimes... But in situations like these, it really does pay off over the long-run to WAIT until you have a pin bar setup that is ACTUALLY TOUCHING THE SUPPORT LEVEL or key support zone (or resistance for downtrend). I have seen this same scenario play out in the markets more times than I can remember in my trading career; the market almost gets to a level and forms what looks like an OK signal, then it moves a little bit lower or higher and forms another signal that is better / more well-defined and actually hitting the level of support or resistance.
This is yet one more example of how PATIENCE PAYS OFF, quite handsomely. Look at how huge the move was from the better pin bar on August 28th that was actually rejecting the level. This is what I mean by “sniper trading”…you don’t trade until you have a very easy trade in your cross hairs. Traders who constantly take every pin bar that looks halfway “decent”, naturally end up enduring a lot more losing trades and thus more stress and more temptation to become emotional and then over-react by risking too much or trying to “make back” lost money.
If you want to become a skilled price action trader, the first thing you need to accept is that patience pays off over the long-run and that sitting on the sidelines can be a VERY profitable position. I have discussed this message hundreds of times (probably thousands) in articles and emails, yet many traders continue to ignore it, and lose money. You must get rid of the belief that more trades = more potential for profits. In fact, I would actually go so far as to tell you to start thinking the opposite; starting thinking that more trades = less potential for profit, because for most traders it quite literally does.
Look at that beautiful move in the GBPUSD from that August 28th pin bar (we did discuss that pin bar in the members commentary on the day it formed, for those of you who missed it that day or are new)…would you be happy with just 2 or 3 big trades like that a month? I am happy with those types of trades and these are the types of trades I look for every week and because they are so rare, they are also the reason that I don’t trade some weeks!
I hope you guys have enjoyed today’s members-only lesson. I will try to get these out more frequently because I know they are really useful and helpful to everyone. I try to explain the more nuanced aspects of price action trading in these articles and this really is where the “rubber meets road”.
Special note about using the correct forex charts: If you are not using New York close 5-day charts, you need to be ! These specific style of charts reflect the most pertinent view of the daily chart as they open at the start of the Asian session and close at the end of the New York trading session. (this is the true forex 24 hour open/close period).