Welcome to today’s price action lesson, today we are going to be talking about the most powerful and abundant price action signal used by price action traders – The Pin Bar.
If you are even slightly familiar with Price Action trading, then the term pin bar is probably not un familiar to you as it’s generally the back bone of most price action trading systems used in today’s markets.
The Pin Bar is made up of 3 important sections
- The open
- The close
- The nose
The open price is the price that the bar actually opened at, the close is the closing price for the bar and the nose is what gives the pin bar its most characteristic feature. Pin bars have a long nose which protrudes out of one side of the open and close price.
To qualify as a pin bar, the open and close must be situated at one end of the bar and the nose of the bar must make up at least 2/3’s of the whole bar’s range. The longer the nose of the pin bar, the more powerful the signal.
A Little History
Martin Pring was the first trader to notice this pattern on the charts and in fact, ‘pin bar’ is short for Martin’s original term for the bar formation – ‘The Pinocchio bar’. If you remember the childhood stories, Pinocchio was a wooden doll that was brought to life by his creator, and every time Pinocchio told a lie, his nose would grow larger.
The analogy of Pinocchio tied in perfectly with Martin’s observations, because a pin bar is broken down into 2 moves. The first move is when price moves from position X to position Y, now this initial move draws in the trigger happy breakout traders that tend to jump in with the price momentum.
The second part of the move happens when this initial X to Y movement is not really the markets true intent and is ‘telling a lie’. Price then springs back from position Y to its original position X, and just like Pinocchio, the bar grows a big nose as the ‘lie’ is revealed on the charts, trapping those breakout traders into bad positions.
How Pin Bars are Used in Trading
Pin Bars are one of the most powerful tools any trader can have in their price action arsenal; they form often enough and can be found across all time frames. The pin bar’s core use is as a Price Action reversal signal, so when pin bars form, generally it’s a tip off that the market is ready to move in the opposite direction.
Price action always tells a story, and the story of a pin bar is that price moved to an area on the chart, this movement is then rejected by the market and pushes price back to its original point of origin and sometimes even beyond. Using this basic rejection principle of pin bars, we can use them to…
- Capture potential tops and bottoms to price movements
- Identify breakout traps that can lead to powerful price reversal moves
- Position into trending environments at excellent prices.
When Pring first named the Pin bar the majority of traders were using bar charts. These days traders prefere candlestick charts because they are easier to read and are more aesthetically pleasing. The candlestick equivalent of a pin bar is called a ‘Rejection Candle’.
Pin bars and Rejection candles are almost identical in principle but traders tend to use the term ‘pin bar’ when referring to candlestick charts which is technically not correct.
We call the ‘rejection’ part of the candle the ‘wick’ or the ‘tail’ of the candle stick, A Rejection Candle will have a large wick just like the equivalent Pin Bar would have a long ‘nose’.
For a candlestick to qualify as a Rejection Candle it must have the following attributes.
- The open and close price of the candlestick must be situated at one end of the candle (not in the middle)
- The wick of the candle must protrude out of one end of the candle body.
- The wick must make up at least 2/3’s of the entire candle length.
Depending on which way the wick or nose produces from the Rejection Candle or Pin bar signal will determine whether it’s a bullish or bearish signal. I like to think of the signal as an arrow on the chart, imagine the body of the candle or bar is the arrow head, the wick or nose is the arrow body and the arrow points towards where price wants to go.
Here is an example of how a bullish Rejection candle points towards higher prices.
Notice the bearish Rejection in the chart below, see how the wick of the candle protrudes upwards creating that imaginary downward pointing arrow, signalling price wants to move that way.
Identifying High Probability Trades Using Rejection Candles.
Rejection candles or Pin bars form quite often across all timeframes, but not all of them are ideal trading signals. If you traded every single Rejection candle you would probably lose money, so we need to narrow down the signals that have a higher probability rating.
To quickly improve our chances of success we trade Rejection Candles mostly from the 4 hour and Daily charts, anything lower than the 4 hour time frame significantly reduces the quality of the signals. By sticking with the higher time frames we can immediately improve the odds of success.
To further improve the probability of Rejection Candles and Pin bars, it’s best to trade the ones that form at important Support and Resistance levels on the chart.
Important support and resistance levels are generally the key turning points for price in the market, so combining them with Rejection Candle or Pin bar signals you exponentially improve your chances for a successful trade.
A bullish rejection candle forms off a support level in the market which signaled higher prices.
A bearish Rejection Candle forms at an important resistance, tipping traders off to bearish movement.
Here is an example of how Rejection Candle signals can be great reversal signals in ranging markets…
It’s very easy to see why Rejection Candles and Pin Bars have become one of the most popular tools used by Price Action traders in today’s markets.
Rejection Candles and Pin Bars are powerful, can produce excellent returns, tip traders off to moves before they happen, are easy to identify and require hardly any time to spot a great trading opportunity.
If you would like to continue learning about trading Rejection Candles in more detail, check out the Price Action Protocol trading course where we dive further into Rejection candle analysis, advanced entry methods, stop placements and target setting.