This wouldn’t be a Forex website if it didn’t have a good article about the classic pin bar pattern.
Candlestick reversal signals are some of the most powerful and abundant signals used by price action traders – the most common of them being ‘The Pin Bar’.
Pin bar trading is generally the backbone of most price action trading systems used in today’s Forex markets.
I work with a different flavor of pin bar, which I call a Rejection candle – which provides more trading opportunities, and a more up to date, modernized view of the reversal pattern.
First, let me talk about the classic pin bar, then move on to explain how the Rejection Candle is different, and better.
The Anatomy of a Pin Bar Candlestick
The Pin Bar candlestick is made up of from a specific layout of the following 3 important focal points…
- The open price
- The close price
- The nose or candle wick
The open and closing prices are pretty self explanatory; If you don’t know how read charts yet, please just out the following chapter – Understanding Japanese Candlesticks.
The most characteristic feature of the pin bar the ‘nose’. Pin bars have a long nose (aka candle wick) which protrudes out of one side of the candle body.
To qualify as a pin bar, the open and close must be situated at one end of the bar’s range, and the nose of the bar must make up at least 2/3’s of the whole bar’s range. The general rule of thumb is – the longer the nose of the pin bar, the more powerful the pin bar signal.
A Little History About The Pin Bar
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 par of a pin bars formation occurs when price moves from position X to position Y. Position X isn’t generally anywhere important, but position Y could be a strong technical point on the chart, like a support or resistance level, a weekly turning point or even another focus point.
This initial move draws in the ‘trigger happy breakout traders’, who love to jump in with the price momentum. Sometimes the X -> Y price move may even give the illusion that a major breakout is occurring.
Phase 2 of the pin bar creation happens when this initial X -> Y movement is not really the markets true intent, the charts were ‘telling a lie’. Price then springs back from position Y to somewhere near its original position X.
Just like Pinocchio, the bar grows a big nose as the ‘lie’ is revealed on the charts – trapping those breakout traders into bad positions.
Take a look at the bar chart below. You can see the two phases of price movements which are responsible for printing the pin bar on the chart.
How Pin Bars are Used in Trading
Pin Bars are one of the most powerful tools a trader can have in their price action arsenal. They form very regularly and can be found across all time frames. The pin bar’s core purpose to help the trader identify potential reversals in the market. When pin bars form, it is a good sign the market is ready to move in the opposite direction.
Price action always tells a story. The story of a pin bar is is one where price moved to an area on the chart. The move is rejected by the market, and pushes price back to its original point of origin. Sometimes even beyond if it’s a good signal. Working with the logic of the 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 prefer candlestick charts because they are easier to read, and are more aesthetically pleasing. The candlestick equivalent of a pin bar can carry many names – but here at The Forex Guy we call them ‘Rejection Candles’.
Pin bars and Rejection candles are almost identical in nature. But traders tend to use the term ‘pin bar’ when referring to candlestick charts, which is technically not correct. It also doesn’t sit will since I am OCD about getting things right 🙂 I don’t like to call a white cat black, and I try not to call a candlestick signal a ‘bar’.
I call the ‘rejection’ part of the candle the ‘wick’ or the ‘tail’ of the candlestick. A Rejection Candle will have a large wick just like it’s cousin – the Pin Bar’s.
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. There must not be any large wicks sticking out both ends of the body.
- The wick must make up at least 2/3’s of the entire candle length. Clause: If the wick is less than 2/3’s of the candles range, then the closing price must be either be higher than the opening price for a bullish signal, and lower than the opening price for a bearish signal. This is what makes the rejection candle’s anatomy differ from the pin bar – they can have thick or thin bodies.
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 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 the time frames – but that doesn’t mean all rejection candles are ideal trading signals. If you traded every single Rejection candle you would most certainly end up losing money – so it is very important to narrow down the signals that have a higher probability of working out in your favor.
To quickly improve our chances of success we trade Rejection Candles mostly from the Daily time frame (sometimes the 4 hour). 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 our odds of success – and that really goes for most Forex trading strategies.
To further improve the effectiveness of rejection candle trading, it’s best to trade rejection candles that form at important support and resistance levels on the daily chart.
Important support and resistance levels dominant on the daily, or weekly time frame are generally the key turning points for price in the market, especially those from the weekly time frame. Combining these important levels with Rejection Candle or Pin bar signals, you exponentially improve your chances for a successful trade. The odds are in your favor simply because market history repeats itself. If you study pin bars and rejection candles in your Forex historical data – you will see they continuously produce the same response from the market.
A bullish rejection candle forms off an important support level – signaling to price action traders that higher prices are likely to develop in the near term.
A bearish Rejection Candle forms at an important resistance, tipping traders off to bearish movement before it happens.
Here is an example of how Rejection Candle signals can be great reversal signals in ranging markets…
Here is another example of another ‘thick bodied’ bearish rejection candle range setup that was discussed in the War Room…
Notice how the rejection candle had a thick bearish body it to, unlike the common pin bar which only had a small range it its body. These thick bodies give the signal a little bit more ‘oomph’ and tend to work out much better. Check out what happened next…
As you can see this rejection candle was able to give a price action trader the early warning sign needed to position into a bearish trade BEFORE the actual sell off occurred. This is a good example of how powerful price action trading really is.
Trading Rejection Candles Inside Trending Markets
Rejection candles also work great in trending conditions as well. I know we said they are ‘reversal’ signals but if you think about it, reversals occur with in a trend. Rejection candles are very good leading indicators to let price action traders know when a counter trend movement has terminated. These counter trend moves push prices into what we call ‘hot spots’ where the price is right for positioning into a trend.
“Buy the dips and sell the rallies” – Have you heard this saying before?
Rejection candles that form at the dips and peaks within trends can offer very lucrative trading opportunities…
Check out the chart below. The USDCAD has printed a bullish rejection candle. Can you guess where this market might be heading???
Video: live rejection candle trade I took on the EURNZD daily chart…
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 are very powerful candlestick signals, and coupled with the right money management plan you can really do well. Rejection Candles produce excellent returns for price action trader, tip us off to moves before they happen and give us the framework to build a logical trade position from.
Rejection candles (and even pin bars) are easy to identify – they don’t take much effort at all to spot a great trading opportunity, especially when used with our Forex trading strategies.
If you would like to continue learning everything there is to know about Rejection Candles like; rejection candle entry strategies, stop loss placement, money management for rejection candles and even filtering out good vs bar rejection candle trade signals – the Price Action Protocol trading course inside our Forex Price Action War Room is going to be a -perfect- fit for you.
Thanks for the reply ,Dale. Appreciate it. Are there any built in alert and pin bar indicator programs you recommend? I know what the parameters of a valid pin bar Id like to trade are, but finding them in many different markets in time to trade new ones is also a concern. Any tips, suggestions or recommendations on the best way to accomplish all this would be appreciated as well. Tired of trying that’s and systems that aren’t for me or don’t work well for me! Thanks again! Eric
Why is it that anything I see or come across with respect to pin bar and pin bar reversals has to do with forex? Would that strategy not apply equally to stocks or any other trading medium? Is it because there are so few forex pairs to track compared to equities and commodities? Or alarms/alerts would not be feasible on too many markets to follow? haven’t come across the answer to that question on the internet. Seems to me that all charts and markets would have pin bars and reversals of pin bars. Also is there any specific trading platform and built in alerts for pin bars you recommend? Would like a platform and easy to use alert system that is already incorporated in a platform that is accurate and easy to use on all time frames. Any help with all these things and suggestions or tips you have would be appreciated! Thanks for the help and happy trading!
Replying to: eric
Forex is 100x more liquid and that makes for better flowing price action. All the gaping and limited trading hours in the stock market makes choppy/broken price action. I am not a stock trader, I am sure pin bar/tailed candles will work there, but I don’t think the Forex strategies will work as well.
very helpful, I am at an early stage.
Not sure why u call it a thick candle they all are same width
I’m a four ear trader
Replying to: dave
You’re using your measuring tape the wrong way 🙂
Can you share your Risk/reward tool it’s look helpful for me. Thanks for great article
Fantastic explanation of the pin bar trading strategy. This has completely changed the way I now trade. Pin bars are great because they are easy to recognize and also quite easy to trade. Great combination for beginner traders 🙂
Thank you very much Sir Woods. I really appreciate this and the information you providing on helping me. Now my eyes opening day by day and thanks to you. I am now two weeks trading with pin bar strategy and is doing what you have said it does. Now I will try on learning the counter trend movements. Thank you very much, great atticle.
David H Hall
Excellent and to the point easy to understand.
What are the values of the moving averages?
Replying to: Olasoji Lawal
10 & 20
Great article, there have been some really good pin bars lately. USDCAD, AUDJPY and CADJPY come to mind. A good study if you want to see some live examples. All on daily or H4 charts.
I understand the whole idea but what does confuse me is if you look at where it says swing level the second touch red box, that looks like a bearish rejection candle to me but why did it continue up?! also the 3rd candlestick from the beginning left also looks like a rejection candle to me. Is there a reason it did not do what it was supposed to, or am i missing something and looking at this the wrong way? Thank you
Replying to: Victor Diaz
It’s not just about the candlestick signal which many traders put too much emphasis on. It’s about applying good market analysis in combination with the candlestick signal. So, there are a few other factors we look for when deciding if a reversal candle is high quality or not.
Well explained. Thanks.keep it up your good articles!
Very detail explanation pin bar with SnR.
I agree. Just remember to look at the size of the pin bar compared to the previous bar or candle. Say if the pin bar itself is either the same size or larger than the previous candle then the probabilities or higher in my opinion.
I do understand the anatomy for the pin bar and rejection candle but which things must I look for when I am looking thick body rejection candle?
Replying to: Senzo ngwenya
Think of a rejection candle, with a body that is larger than normal.