January 11 2012 - pinbars

I've been doing some research on pinbars with some promising results. A pinbar is called such because it resembles Pinochio's nose. The long wick of the candle represents the "nose". The wick suggests a strong trend before a sudden and equally strong reversal. The "nose" in other words represents a lie, and anyone who tried to trade the nose would get hurt by the reversal.

The way to successfully trade a pinbar is to trade in favour of the reversal once the pinbar closes. Not all pinbars are equal. You can get poor-quality pinbars with short noses (or wicks) and long bodies that occur in the middle of nowhere, and you can have high-quality pinbars with long noses and short bodies that occur in meaningful places on the chart e.g. near resistance/support zones. The following diagram highlights five pinbars that developed over the last 48 hours.



Bar 1. This is what I'd consider a very poor quality pinbar. The nose is very short and the pinbar develops in between two daily pivots. However, if you did decide to trade, you would have done well, pocketing up to 40 pips. But note the retracement in the candle following the pinbar. It came very close to breaching the top of the pinbar, which is where I'd normally set my stop loss.

Bar 2. I would consider this a good-quality pinbar. It forms as a result of bouncing from a daily support level (the pink line). If you enter at the close of the candle, you have been handsomely rewarded. Note the minimal retracement in the following candle.

Bar 3. Likewise, another great pinbar. This one forms after retreating from the daily pivot point (orange line). The nose is really long, the body is short and it forms in a meaningful place. There is minimal retracement in the following candles. Nice.

Bar 4. This one is an "okay" pinbar. The body is sort of fat, and the nose is so-so. What would be most concerning is the fact that it is in the middle of nowhere. Trading this would've been okay for a scalp, but otherwise it is best to avoid. Note the retracement in the following candle that nearly hits the end of the nose. The fact that this pinbar forms halfway between the last swing high and swing low also decreases its quality.

Bar 5. I traded this one today and enjoyed a 20+ pip reward. The form and body of the pinbar is very good, and more importantly, occurs near a daily support level. Additionally, this occured in the weekly demand zone, which added probability in my favour. The retracement in the following candles caused me a little concern, but as my stop loss was situated at the end of the nose, I never got hit. Price then rallied to support level 1 (pink line). My take-profit was located just below here. Very good. :)