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How To Use Pin Bars To Identify Potential Reversals
Education | 30 May 2013
By: Stuart McPhee
Articles (22) Profile

The pin bar is a common candlestick pattern that can be found at either the extreme reversal point of the trend, or at the start of a continuation of the trend.

Chart 1 shows an example of a pin bar candlestick pattern that results in a reversal of price. Notice how the body of the candlestick is small in relation to the trading range and sits at one end of the range. This is a key characteristic of a pin bar.

Chart 1: Example of a pin bar candlestick pattern

 

When you have a cluster of pin-bars, these can be far more predictive than just a single one in isolation. Long shadows and small bodies are preferable. As a rule of thumb, you would typically want the body of the candlestick to be less than 20 percent of the entire range.

Pin bars are often seen at the extreme reversal points of trends. They represent exhaustion of the prevailing move, and quite often they occur because the final bulls have bought in an uptrend or the final bears have sold in a downtrend.

Top reversals (as shown in Chart 1) will have upper shadows indicating that a move higher was aborted as sellers grappled for control of prices. If everyone has bought, then who’s left to buy?  Consequently, in a market where there are few available buyers and potentially many sellers, prices are likely to fall.

Chart 2: Daily chart of EUR/USD 

 

Chart 2 is a daily chart of the EUR/USD where the pin bar from Chart 1 is shown in context. You will see how the pin bar occurs at 1.32, which was a resistance level just a couple of weeks earlier. The fact that the pin bar occurs at a level (1.32) where we could reasonably expect some resistance again, adds weight to the pattern and therefore increases the probability that prices will reverse.

Pin bars at key reversal points are excellent confirmation of the importance of that level. They are often seen at pivots, further strengthening the value of the pivot-level and the expectancy of the candle pattern itself.

Whilst candlesticks provide insight into the interaction between buyers and sellers, some patterns are quite effective at identifying likely price movement. Technical analysis is never perfect but pin bars are certainly useful in identifying trend reversals and helping to inform your trading decisions.

 

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Stuart has more than 16 years of trading experience under his belt and specialises in technical market analysis of major currency pairs. Apart from being the author of several bestselling trading books, with his most recently released book "Trading in a Nutshell", Stuart contributes to daily newletters and blogs. He also produces articles and videos on the how tos of technical tradings. For more information of Stuart, you can follow him on twitter @stuartmcphee or check him out on Google+.

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