Pin Bars: Pin-Pointing The Trend Reversal

Pin bar is a great tool to catch the trend reversal in the stock price and if it is used in conjunction with other indicators, it can give the trader an edge in concluding the trade successfully, says Karan Bhojwani.

“95% of all traders fail’ is the most commonly used trading statistics. If we assume this as a fact, the traders obviously require a tool that gives them an edge over other market participants. Many traders spend years trying a variety of indicators and indicator settings and combinations to find the best combination that will give them an edge. 

Be that as it may, the fact of the matter is that as a trader with a specific end goal, it is not enough to simply rely on a bundle of various indicators to ascertain the forward movement ofa stock price. Keep in mind, you want to trade like the big HNIs and institutional traders do. Regardless of which indicator traders use, almost all of them are looking at the price of the stock. A trader needs to learn to read the price action as this is one thing common for all trading systems and all traders. Knowing how to make decisions based on the price action will increase the odds of winning. 

If you are a new trader who is beginning the interminable scan for an edge in trading or if you are a trader who has effectively invested an extensive time looking to find the best trading frameworks, this article would illuminate you as we will talk about one of the most straightforward and yet capable and reliable price action pattern,known as ‘Pin Bars’. 

Let’s go over and understand what a Pin Bar is. 

Pin Bar : In Martin Pring’s‘Technical Analysis Explained’, he called the pin bar as the ‘Pinocchio bar’ because it lies about the market direction. What that means is that the market price went to a certain level then came all the way back to near the opening price. Thereby, it ‘lied’ as to where the price was going. A pin bar is made up of a small body and a long wick or shadow extending from the body. Pin bars are very noticeable and stick out on charts. This makes them easy to identify on the chart. The pin bar formation is a price action reversal pattern that shows that a certain level or price point in the market was rejected. 

A bullish pinbar : shows rejection of lower prices. The lower tail or shadow shows that the bears were in control earlier but were eventually overcome by the bulls. 

A bearish pinbar shows rejection of the higher prices. The upper tail or shadow shows that the bulls were in control earlier but were eventually overcome by the bears. 

Formation of a pin bar candle: 

The make-up behind the development of a bullish pin bar: Assuming that we are talking about daily candles, in the initial segment of the day, the sellers are in control of the market and are able to take price lower, however, this force peters out towards the later partof the day and the buyers recapture control of the market and begin to push prices higher and, in the end, even manage to close the day higher than its opening, resulting in a pin bar on thedaily chart. This is demonstrative of the fact that sellers, even though they were solid in the initial segment of the day, lost the fight and now the buyers are obviously in control.The reverselogic applies for a bearish pin bar. 

Characteristics of the pin bar formation: 

A pin bar is very easy to notice on a price chart but not all candles that look like pin bars actually qualify as a pin bar. To qualify as a legitimate reversal pin bar, the following requirements need to be fulfilled by the pin bar candle.
— Wick (also known as the tail or shadow) should be at least three times long as compared to body.
— The smaller the body the better,or the bigger the wick of the pin bar, the better.
— The open and close of the pin bar should be very close together or equal (same price), the closer the better.
— The body must be on one end of the wick, not in the middle. 

Which pin bar should a trader take into consideration for trading? 

1. Focus on pin bar in favour of the trend:Whether you are a day-trader or a short term trader, you have probably heardthephrase ‘The trend is your friend’. The first important step in trading with the trend is to identify the trend of the underlying security, i.e. whether the security is in a downtrend or in an uptrend. This can be done with the help of the ‘Dow Theory’

"Trade management is very important for every trader"

Nagaraj Shetti, Technical Research Analyst at HDFC Securities

Price is ultimate thing in trading-'bhav bhagwan che'-does it hold true? If yes, please highlight why it’s so important? 

The saying of 'bhav bhagwan che' in the market is true. In technicals, we give the maximum importance to the price and its trends. Formation of patterns, indicators and volumes are some other things we look into. For us technical analysts, fundamental news or developments are irrelevant. Many a time, we see stock prices do not rise post the announcement of good news, and vice versa. 

For a short term-trader, trade management is extremely important. How can one improve trading results by adopting proper trade management skills? 

For every trader in the stock market, trade management is a very important concept. This includes trading discipline, position sizing, risk/reward ratio, capital allocation and investment in quality stocks. 

Position sizing should be a proportion of his total capital. The risk-reward ratio has to be at the 1:2 level or more, so that the stop-loss triggered during trading does not erode into the trader's capital to a large extent. The capital allocation means one should not be overexposed to a few stocks, but spread his bets on a larger number of stocks, so that adverse movements in some scrips does not wipe out his capital. Avoid low quality penny stocks. And, more importantly, avoid trading at times when the markets are sideways or not conducive for trading (as per the traits of the trader – some find it difficult to short; hence they should stay away in falling markets). 

Important characteristics of a Pin Bar? 

In technical terms, the Pin Bar is a reversal pattern. Formation of this pattern signals a sharp rejection of bulls from the highs or rejection of bears from the lows. Normally, a bullish Pin Bar could mean that the underlying was in a downtrend and we observe a sharp recovery from the lows. A follow-through upmove in the next session could be a confirmation of the bottom reversal (the opposite is true for a bearish Pin Ball pattern). 

Which Pin Bar (bullish/bearish) is of high importance for a trader? 

Pin Bar patterns are reliable reversal signals in the market and trading positions can be created after the confirmation of the pattern. Placing a stop-loss at the high or low of the Pin Bar pattern (for bearish or bullish trade) is important. Therefore, both the patterns are equally important for traders for the long and short trading set up. 

As a day trader, which time frame should we give more importance? 

For intra-day trader, a combination of 15 and 30 minutes could throw up good trading decisions. 

In a breakdown or breakout, a trader gives high importance to volumes. Similarly, should a trader gauge volumes of Pin Bar and take action accordingly? 

Yes. Considering the volume behaviour during the formation of the Pin Bar pattern for trading could increase the chances of success. 

Volume plays a crucial role in Pin Bar formations. For example, if intra-day selling during formation of the bullish Pin Bar happens with low volume and the later upside bounce takes place with high volumes, then the pattern formation becomes more reliable (reverse holds true for bearish patterns). Low total volume on Pin Bar days does not lessen the importance of the pattern; but one may look for other confirmations for greater confidence. 

Can you share some of the key observation/techniques of ‘Pin Bar’ which may help our readers to enhance their trading skills? 

Below are a couple of images of Pin Bar indicating a formation of the pattern and a confirmation of a reversal. In the second image, we observe the potential of the movement in the price, after the reversals. 

Observations: 

The body of a Pin Bar must not be more than 20% of the measurement of the body to the end of the shadow. Therefore, if the body is 10 points, the body to end of shadow has to be 30 points, otherwise the candlestick would not be classified as a perfect Pin Bar. The nose should not be very long at all. If the nose (lower shadow in case of bearish Pin Bar and upper shadow for bullish Pin Bar) is too long, such formation will be considered as a different pattern. A perfect Pin Bar will have a very long shadow on one side and a very small shadow, or even no shadow, on the other side. The placement of the formation is of extreme importance. Pin Bars should not appear in the middle of consolidation or a sideways range movement. Often, during times of consolidation, Pin Bars will form, but these signals are much less reliable.according to which a security is said to be in a downtrend if the security is making lower highs and lower lows, where as in the case of an uptrend, the security needs to make a higher highs and higher lows. After you have identified the trend of the security, the next step is to locate a pin bar.For example, if you have identified that a security is in adowntrend and you want to short that security, then wait for the pull-back and the formation of a pin bar. The opposite will hold true when the security is on an uptrend. 

Rule For Trading Pin Bars 

Jay Purohit, Technical & Derivatives Analyst, Centrum Broking 

Price opens within the support or resistance territory, then gives a false move by breaking support or resistance (long shadow) and closes back in the same territory where it opened. 

Example : For bullish pin bar : The candle opens above the support and then corrects sharply (to trap the short sellers) and again comes back above the support levels for a close. Vice versa for bearish pin bar. The support and resistance can be identified from the previous high/lows or trendlines or retracement or extension levels or pivot levels (for intra-day). 

Misconceptions/common mistakes:
1) Traders assume that formation of a pin bar is a confirmation of trend reversal.
2) Novice traders interpret pin bars as a reversal signal even in a sideways market.
While trading pin bars should not be ignored, a pin bar formed after a decline/rise around the support/resistance levels has higher probability of being a reversal signal.Trade should be entered only after receiving additional confirmation from an oscillator/indicator. 

Multiple time frames 

As a trader, it is important to analyse a chart in multiple time frames. The approach should be systematic.You need to analyse a chart in a higher time frame(weekly or monthly) to identify the trend and major support and resistance levels. The next step involves moving to a lower time frame to pinpoint your entry and stop-loss levels. Pin bar strategy Trading with pin bar requires a dynamic approach, alternate methods of analysis are possible, depending upon the set of tools selected. I would like to share a strategy made by us to trade pin bar with the readers.
1) Identify a pin bar after a considerable move in one direction.
2) Let’s take a scenario where the price has fallen by 8-12% and its oscillator(Stochastics) is in the oversold zone.
3) The stock is giving false breakout on the downside.
4) Also, Stochastics oscillator is showing a reversal sign, either bya positive crossover in the oversold territory or positive divergence.
5) When the price is above the high of the pin bar, take a long entry with a stop-loss at the low of the pin bar. Target should be kept 2.5 times the height (high to low) of the pin bar. 

For short sell trade, the opposite strategy of the above scenario would apply. 

The charts below will give you clear idea of the strategy : 

Some recent examples of bullish and bearish pin bar trading strategies: Bullish: n Adani Ports (Sept. 28, 2017.) n HDIL (Dec. 18, 2017.) nTata Motors DVR (Dec. 18, 2017.) n Yes Bank (Feb. 21, 2018.) Bearish: n Sun Pharma (Feb. 12, 2018.) n Bank of Baroda (Oct. 26, 2017.) n Bharat Electricals (Nov. 29, 2017.)

2. Important support and resistance levels: It is commonly said that the stock and future markets trend about 30 per cent of the time.Hence, markets are not in an obvious trend,aswe saw in the example above. In this case, you would like to know how to trade pin bars in other market conditions. After you have mastered the art of trading pin bars in trending markets, you can look for pin bars that simply form at key support or a resistance levels in the market. The key support and resistance levels add a powerful factor of confluence to a pin bar set up. 

3. Look for pin bar at key retracement levels: The good old ‘bounce’ off a crucial retracement area is perhaps just as avidly followed and anticipated as the breakout and retest phenomena. If you spot a pin bar formation at the Fibonacci retracement level, you can have a powerful trade set-up. 

Some of the key trading strategies for pin bar: 

1. The Fakey Trading Strategy: This strategy was made popular by a forex trader named Nial Fuller from Australia. He described this trading strategy as a ‘false breakout from an inside bar pattern’. The Fakey pattern always starts with an inside bar pattern. When the price initially breaks out from the inside bar pattern but then quickly reverses, thereby creating a false breakout and closes back within the range of the mother bar or inside bar, we have a fakey pattern. 

As we can see in the illustration above, the fakey pattern essentially consists of an inside bar followed by a false break of that inside bar and then a close back within its range. The fakey entry is triggered as price moves back up past the high of the inside bar.

2. Pin bar and EMA combination: n Time frame: Daily/4 hour/1 hour n EMA: 50-day EMA and 100-Day EMA n 

Condition: 1. 50-day EMA should be above 100-day EMA 2. Both the moving averages, i.e. 50-day and 100-day EMAs, should be in rising trajectory 

Step-by-step action plan: 

Here’s how you can put this strategy to work in your trades:
Step 1: On a daily chart, plot 50-day EMA and 100-day EMA.
Step 2: The 50-day EMA should be above 100-day EMA and both the EMAs should be on rising trajectories.
Step 3: Look for pin bar near 50-day EMA and enter as soon as the price moves above the pin bar high.
Step 4: The 127.2 and 161.8 extension levels are popular places to take profits or scale out.
Step 5: Stop loss can be set at 1% below the low of pin bar. 

Here’s an example of this strategy:  

Stock Name: IndiaBulls Housing Finance . Time Scale: Daily . The stock formed a pin bar’ around 50-day EMA, the 50-day EMA was above 100-day EMA and both the EMAs were on rising trajectories. Entry Price: The entry level is marked in yellow line (above the high of pin bar) Stop Loss: 1% below pin bar candle Target Price: 161.80 per cent extension level I.e. Rs1340 marked with green line in the chart. 

Conclusion: 

The first basic premise of Dow Theory suggests that all information—past, current and even future—is discounted by the markets and reflected in the prices of stocks and indices. Hence, the most important thing in trading is price action and the pin bar can be a great trading set-up for the price action traders to have in their arsenal. However, if a trader is going to use it in the long run, hewill have to follow some strict guidelines. As mentioned in this article, there are some pretty simple and clear-cut defined rules with the pin bar. Keep in mind that not all pin bar set-ups are created equally and some will be more likely to workout then others. By trading with confluence such as support and resistance zones and with the trend, you will greatly increase your chances of a successful trade.