Learn to Trade

Costly Pin Bar Mistakes That Are 100% Preventable

By Rob on May 20, 2016

Reading Time: 5 minutes

Touted by many price action traders—myself included—for their simplicity, reliability, and high-probability nature, pin bar reversals have it all. They’re (relatively) easy to identify and trade, they work equally well across all the various markets and asset classes, and they’re tradable in up, down, and sideways markets. So advantageous, in fact, that it begs the question, “If pin bar reversals are so great, why doesn’t everybody trade them?” In this article we discuss pin bar mistakes that are 100% preventable.

Answers to that will vary, of course, but among the likely reasons is probably that the repeated commission of one or more pin bar mistakes have led traders to believe that the patterns either don’t work, period; or they just don’t work for them and their particular trading style.

Now, no trading strategy or method out there works every time, but if you’re struggling with or avoiding pin bar reversals in your own trading, first be sure that you’re not falling victim to these pin bar mistakes, which are quite common and costly, but also—and here’s the good news—completely preventable.

Pin Bar Mistakes You Can Eliminate Starting Today

Whether it’s a problem with recognition or application, or something is missing in your analysis, most pin bar mistakes don’t have to stick with you forever. Many, in fact, can be prevented just as soon as you ensure that you’re “following the rules” with respect to trading pin bar reversals. So here are some common pin bar mistakes, and more importantly, how to overcome them:

Faulty Pattern Recognition

Some bars may look like pin bars, but are really just imposters, and for traders who don’t study them carefully enough, it’s easy to get overanxious in the moment and pursue trades based off of what turns out not to be a valid entry signal at all.

Needless to say, that’s one of the pin bar mistakes traders can avoid. Here’s what to look for when confirming that what looks like a pin bar reversal really is a valid entry signal:

A long wick, or “tail,” extending above and below the opening and closing prices
A shallow “body”—the area between the open and close—that’s situated entirely in the upper 50% of the wick (for a bullish pin bar reversal) or entirely in the lower 50% (for bearish)
Ideally, the body of the bar would even be located in the upper third (bullish) or lower third (bearish) to represent a stronger and more decisive entry signal

Right Pattern, But in the Wrong Market Context

Pin bars print relatively often on the charts, but each one won’t necessarily signal that a viable trading opportunity is setting up. That depends largely on the market context, which includes whether the market in question is trending upwards or downwards, or perhaps is range bound.

Especially in trending markets, your primary aim should be to trade in the direction of the prevailing trend. As a result, in an upward-trending market, bullish pin bar reversals are going to be most valuable, enabling traders to buy strength, and do so at less-expensive price points where positive momentum is present and on their side (see below). Alas, be especially selective about trading bearish pin bar reversals in up-trending market conditions to protect yourself from what is ultimately one of the common, yet avoidable, pin bar mistakes plaguing price action traders.

Proper Trading of Bullish Pin Bar Reversals

And, and as you might expect, in downward-trending markets, bearish pin bar reversals will be especially important. Such patterns will signal risk-controlled selling opportunities in markets showing a bias in that same direction (see below). Conversely, be especially careful about trading bullish pin bars amidst a down-trending market context.

Proper Trading of Bearish Pin Bar Reversals

(Do be advised, however, that pin bars can help traders isolate countertrend trading opportunities just the same. By nature, however, these are low-probability, high-risk trades, but that doesn’t mean you should avoid them entirely. For more, read our recent profile on Trend Trading vs. Reversal Trading.)

Trading without the Required Confluence

Probably even more than factors like the strength of the bar and the market context, the force that really makes pin bar reversals work is whenever they occur at established support or resistance on the chart. This is far and away the most critical condition when trading pin bars, and also the one that’s missing most often when pin bar mistakes do happen.

Taking pin-bar-inspired trades in the middle of a range, or floating some distance away from a key level, rarely works, and isn’t called for in the terms of any viable trading strategy. Instead, only use corresponding pin bars whenever they occur on or very close to at least one of these technical junctures on the chart:

Horizontal level
Trend line
Moving average
Key psychological and/or historical level
Fibonacci retracement level
Weekly or monthly pivot point

Using Shorter-Term Time Frames

Finally, one of the pin bar mistakes that can make traders abandon them altogether is trying to trade on low time frames intraday. Once traders drill down past the daily chart and reach, say, the 4-hour chart and lower, pin bars are much less meaningful than they would be on the daily or weekly chart.

Intraday price action happens much more quickly, and with big banks and institutional traders able to influence short-term price action, such pin bars don’t signal tradable price action nearly as often here as they do on higher time frames. On longer-term charts like the daily and weekly, however, pin bar reversals signal price action that decisively rejects a key price level, empowering high-probability trend moves with momentum acting in their favor.

Intraday traders who have experimented with pin bars may have found little or no success and rightfully decided against using the patterns. But, if swing trading is also part of their repertoire—or yours—pin bar reversals could be not only in play, but perhaps a “bread and butter” price pattern under the proper circumstances.

Thus, don’t make the mistake of judging the validity and effectiveness of pin bar reversal patterns solely on the lower time frames. Use them how we do, avoiding these common pin bar mistakes in the process, and then objectively judge the performance and results for yourself.