Trade Pin Bars The PLTfx Way To Bank 200 Pip Winners And Avoid The Retail Trader Trap
May 20, 2016
It’s A Liars Market
New traders love to trade pin bars, there is just something about the idea of a candle "lying" to the market that has captured the hearts of the retail masses, but so often those hearts are left broken when the pin bar fails to play out as anticipated and the head scratching begins
A lot of new traders eventually find their way to price action, they might begin with fundamentals then look into indicators and a maze of other things but eventually they will find their way to price action trading and once there the idea that they have identified this one, simple candlestick that alerts them (and only them!) to a forthcoming reversal, makes them feel their job is done and riches are right around the corner.
For those of you who have been in this game for a while you will know that sadly this just isn’t the case. Now, don't get me wrong pin bar candlesticks can be a fantastic entry signal and often times do indeed precede a strong reversal in the market but that doesn't mean that you should go jumping in risking your hard earned money every time you see a pin bar pop up.
So, what exactly does a pin bar represent?
The pin bar candle stick is supposed to represent a sharp shift in sentiment. Ok let's think about a bullish pin bar. Regardless of the time frame, this candle tells us that in this specific period buyers were initially in control, driving price higher up until a point where all the demand was soaked up and sellers stepped in slamming price back down. That is what this candle represents (and obviously vice versa for a bullish pin bar).
So, the retail trader looks at this candle and thinks to themselves that this specific period of reversal in sentiment is symbolic of a much larger shift in sentiment and a forthcoming reversal. The fact is, sometimes it will be and sometimes it won't be, that’s trading - nothing is 100% except the brokers commission.
The problem is, with so many of the traders that we've known and spoken with over the years that more often than not these beloved candlesticks just don’t kick out the big pips they are supposed to.
So, what gives?
The market is an ever-changing environment that morphs between trend and range phases, periods of high and low volatility, and periods of varying opportunity.
There is money to be made in all market types but it is very difficult to make money in exactly the same way during different market types.
Whilst in certain conditions a clear pin-bar candlestick will indeed represent an exhaustion and precede a nice trade-able reversal, there are plenty of times where that same pin bar candlestick simply represents a pullback within a trend, nothing more, just a minor correction.
To succeed, you need to be able to look at familiar things in a new way.
Ok, we just looked at what is actually happening between buyers and sellers to form the pin bar candlestick. So let's think about a bearish pin bar candlestick within a trend situation. Price is moving steadily higher as buyers continue to push however, we reach a certain point and the buying weakens, selling kicks in and we get our pin bar.
Instead of marking the top of the market and an imminent 1000 pip reversal lower, this candlestick is probably just showing a minor correction within a bullish trend. Trending markets love to make minor corrections which happen for all sorts of reasons, usually profit taking and position squaring, allowing for the chance to reload.
The trick is to learn to tell the difference between a pin bar that is likely to see a big reversal and a pin bar that is the reversal before the market pushes on. If you get this down, this will make untold difference to your trading.
Sounds simple right?
Of course, this skill in determining the probable outcome of any one pin bar candlestick requires a whole lot of experience which requires a whole lot of time. You’ve probably heard of the 10,000-hour rule, but how many of you have actually spent 10,000 hours studying the charts and watching price action unfold live?
The reality is, for most of you looking to break into trading who have a family and full time job, it's going to be a long time before you can say you've clocked 10, 000 hours and with it developed the skill and insight needed to read candlesticks like this and if you're looking at several different markets each day you really don’t want to be spending hours trying to decide whether any particular candlestick is going to work out.
There is an easier way.
The PLTrend Indicator is a proprietary price action barometer that we've been working on for a few years now. The indicator measures range and momentum on a candle to candle basis to indicate whether the market is in reversal or continuation mode and moves beyond the traditional concepts of range and trend to give a reliable guide that can be used when making trading decisions and one of the ways the indicator works best is when acting as a filter for trading pin bars.
(Compare the traditional price action on the left to the way the indicator shows the same price action on the right )
The indicator changes the way the candlesticks are actually painted on the charts and so candles that would normally be shown as bearish candles on an open/close basis will sometimes be shown as bullish candles and candles that would normally be shown as bearish on an open/close basis will sometimes be shown as bearish candles. This one alteration can make a powerful difference to how you view the charts and allow you to far easier spot periods of potential reversal and periods of potential continuation.
The benefits are obvious but profound, you have a far better sense of when to get in to a trade, when not to get into a trade, when to hold and when to exit.
In the context of trading pin bars then, the premise is simple. Only trade pin bars that are confirmed by the indicator and let all the others go. That's it!
PLTrend Indicator In Action
So looking at this first example then we can see a classic situation which retail traders usually fall prey to. Price is moving gradually higher and then we see a traditional bearish bin par candlestick form at a decent resistance level (note the double top formation).
However, you will notice that the indicator doesn’t confirm the signal by painting the candle red. The indicator paints the candle blue signalling the likelihood of bullish price action continuing and you can see that is exactly what happened – the market ignored the pin bar and instead of producing a bearish reversal, continued to push higher, taking with it the stops of the pin bar faithful.
Now, in contrast to this first situation look at the example we have here. In this instance we can see that after the failure of that first bearish pin bar (which wasn't confirmed by the indicator) price suffered a sharp decline before stalling out and reversing higher once again.
Note the point at which the reversal higher occurred and you will see we have a really clear bullish pin bar candle; you will also note that this time the candle is confirmed by the indicator. The indicator paints the pin bar blue, signalling a likely bullish reversal and you can see this is exactly what happened.
So in the first example we saw a traditional bearish pin bar which wasn't confirmed by the indicator go on to fail and in the second example we saw a bullish pin bar which was confirmed by the indicator produce the expected reversal.
Just these two example alone highlight what a powerful trade confirmation tool the indicator can be not only in helping you gain entry to high probability trades but also in helping you avoid the low probability trades that most retail traders suffer through.
Using the indicator to confirm the pin bars that you trade will immediately improve your trading but this is only half the battle, you also need to learn the specific locations at which the presence of a pin bar can be a tell-tale sign of big reversal.
For those of you familiar with PLTfx trading you will know that we focus on identifying specific price action patterns in the market which we’ve spent years researching, before then consulting the PLTrend Indicator as a confirmation or rejection of trade execution.
This powerful two-tiered way to approach trading the markets. is precisely what has helped us to deliver a steady stream of profits over the last five years.
As mentioned earlier, the benefits of using the indicator to confirm price action signals is not found in helping you gain entry to winning trades and avoid losing trades but also in improving your trade management.
Retail traders have an overwhelming tendency to manage their trades in a neurotic way which more often than not sees them exiting trades earlier than they should and abandoning what could have been a really profitable trade.
In the context of trading price action, this issue can be magnified. Again, without the years of experience needed to develop a really intuitive read of price action and an understanding of the expectancy of certain situations price action traders often live and die by their sword, using certain candles to enter a trade and those same candles to exit a trade but as we discussed earlier, these exact same candles can have different meanings in different situations.
The pin bar is a fantastic example of a candle that is often used by price action traders to exit a trade. Premised on the belief that the candle signals an imminent reversal, traders will exit at the first sign of a counter-position pin bar – however as discussed earlier, there are times when pin bars simply represent a minor pull-back in a trending market and nothing more.
Just this week we booked a fantastic 201 pip winner in GBPUSD and this trade is a fantastic example of how to use the PLTrend Indicator to confirm your price action bias and help you make key decision.
After going long GBPUSD at 1.4397 with a stop at 1.4327 we saw the initial explosive move higher tempered by the formation of a bearish daily pin bar. At this stage we had a lot of traders writing in asking if we were going to exit the trade based on this price action signal and the forthcoming “sell-off” that was certain to come.
(note how the indicator, shown on the right, doesn't paint the pin bar red which would signal a reversal and instead paints the pin bar blue signalling bullish continuation)
However, referring to the PLTrend Indicator it was clear that this pin bar wasn’t to be considered a reversal signal and instead further bullish continuation was expected. We held the position and banked at target for a 201 pip return on our 70 pip risk.
The PLT method is underpinned by a rigorous approach to risk reward which ensures we always make far more on our winning trade than we lose on our losing trades allowing us to be consistently profitable in the long run even during periods of low win rate.
Hopefully by now you have a clear idea of how the indicator can be an invaluable tool for confirming or rejecting bias in the markets and using the indicator in conjunction with typical pin bar analysis is just one of the many ways in which we use the indicator on a daily basis.
In coming articles we will take a look at further ways you can use the indicator in your trading, some of the different patterns that we focus on in the markets as well as sharing some key insight and tips from our years in the markets.
Have a great day!
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