The Pin Bar, Weak Strategy But Great Tool
The pin bar is a great tool for binary options traders but is a weak strategy when used on its own.
The Pin Bar Strategy is nothing new, especially to those of you who like to use Japanese candlestick charts. This is a reversal strategy based on price action and chart patterns. If you are familiar with candlesticks you will recognized this signal as a “shooting star” or “hammer” reversal, depending on market trends. The Pin Bar strategy was first introduced to the contemporary trading world by Martin Pring in his book Pring On Price Patterns. Martin Pring is one of the leading technical analysts of today and is the author of one of my favorite books, Technical Analysis Explained.
What Is The Pin Bar Strategy?
The Pin Bar Strategy is a 3 candle, or three bar, reversal signal. It is a useful signal in every time frame and works especially well when used in conjunction with another technical indicator like an EMA, trend line, retracement or other support/resistance tool. The strategy is based on the classic shooting star and hammer reversal patterns from Japanese candlestick charts. However, unlike a shooting star or hammer which needs the third candle to close to confirm the signal, the Pin Bar strategy is actually signaling a trade with the pin bars close.
This is how it works, assuming the market is in an up trend and you are expecting it to hit resistance. The market move up and moves up, then one day makes a long white candle and closes just under a resistance line you are watching. The next day the market moves up again, crosses over the resistance, moves higher and then sells off to close at or near the days open. The second candle is known individually as a “tombstone doji” or “shooting star” and is the signal of potential reversal. This is the entry signal. The exact opposite is true in a down trend. Simply wait for the market to reach a support level and then watch for the hammer doji to form.
On the third day you have a couple of options for picking an entry point. You can enter at open, expecting the market to move lower (or higher) during the day. This is the riskiest entry because there is just no telling where the market is going to open and where it is going to go before the close. Hammers and tombstones are potential reversals, not guaranteed ones.
You can also enter after the open. At this point there are a couple of ways to take the signal. The best signal occurs when the market opens below the previous days close, moves higher and then drops back from resistance (or bounces from support in a downtrend). The buy in this case would be when the market moved back below (or above) the previous days close. Another good signal is when the market opens higher(or lower) than the previous days close and then moves lower. The signal here again is when the market moves lower/higher than the close of the second candle.
Why The Pin Bar Strategy Is Good For Binary Options
This strategy is good for binary options because of its versatility as a tool and trading signal. It can be used in any time frame, with any asset, in either direction and can be trend following or contrarian. The signal is easy to read and when used in conjunction with other tools can generate some really powerful signals. This strategy can also be applied trading ranges and is great with high volatility assets.
Why The Pin Bar Strategy Is Not Good For Binary Options
The Pin Bar Strategy is not good for binary options because it is not a strategy, it is a tool. Using the pin bar as a strategy will lead to frustration and loss. For one thing, true pin bars are rare and risky. They are risky because there is no guarantee the market will reverse on the third day, or even move in a way that creates a profitable trade. When used by itself the Pin Bar Strategy can and will produce a lot of false signals. A strongly trending market can make a wide variety of candles on a day to day basis that have no impact on the overall trend. Not to mention that the strategy makes no efforts to weed out false signals or make allowances for overall technical conditions. Pin bars are more effective when used as a tool and part of a more complex strategy and not on their own.
Pin Bar Techniques For Binary Options
As an individual strategy the Pin Bar is a hard one to endorse but as as a tool it is a very easy one to put my stamp of approval on. The Pin Bar Strategy is a reversal strategy at heart but it can be used in multiple ways. It can be used to predict a reversal of trend, it can be used to predict the end of correction, it can be used to identify trading ranges and to confirm support and resistance. The important thing here for binary options traders to remember is that all of those things are potential entry points with higher probabilities of profiting.
I prefer to use the pin bar to confirm trends but also use it to predict resistance. For me, a counter trend pin bar is a signal to get ready to trade. At this point I will wait for a correction, test of support/resistance or other movement that produces a trend following buy signal. The second signal could be another pin bar, or it could be a MACD or stochastic crossover. I always get strong signals when following the trend so that is how I use pin bars. I use Fibonacci Retracement, trend lines and exponential moving averages to determine support/resistance and market conditions. Pin bars that confirm the trend are potential signals to buy, pin bars counter to the trend are signals to wait and see what happens.
I think this is a good pattern and tool for all traders to know and use. It is a classic technical chart pattern, a text book Japanese candlestick pattern and a telling indicator of support/resistance. However, remember that as a strategy it has some real drawbacks. Trading the pin bar is risky. It is as a tool that the pin bar shows its true strength. It is very important to incorporate support/resistance and other technical indicators with the pin bar, or better yet, incorporate the pin bar into your support/resistance analysis. The pin bar is a risky trade but it can be a profitable signal when used with other strategies. It can work with 60 second, 5 minute, hourly and daily binary options strategies.
More Technical Analysis For Binary Options Traders
For more on technical analysis techniques I recommend Martin Pring’s two books Technical Analysis Explained and On Price Patterns. These two books are comprehensive looks at what technical analysis is, how to use it and how to apply it to your trading.
Technical analysis is the same, regardless of what your chosen financial instrument. The same techniques that have worked in futures, forex, commodity and equity trading will work just as well or even better for binary options traders.
The best books on Japanese candlestick charting are written by Steve Nisson. He was the first and remains the best westerner to unveil candlestick charting techniques. This style of charting was developed in Japan and has it roots in the feudal rice markets of the 1600’s. Candlesticks were made for binary options traders. The nature of the candles is identical to binary options; yin and yang, up and down, black and white.
These books can be purchased on line at the Book Depository. The Book Depository has 100’s of titles relevant to binary options traders, free shipping world wide and has some of the lowest prices of any online book merchant.