how to get profit from Evening Star Candlestick Pattern

The Evening Star candlestick is a three-candle pattern that signals a reversal in the market and is commonly used to trade forex. Correctly spotting reversals is crucial when trading financial markets because it allows traders to enter at attractive levels at the very start of a possible trend reversal.

This article explores the following talking points:

  • What is an Evening Star candlestick?
  • How to Identify an Evening Star on forex charts
  • How to trade the Evening Star candlestick pattern
  • The reliability of the Evening Star in forex trading

WHAT IS AN EVENING STAR CANDLESTICK?

The Evening Star pattern is a three-candle, bearish reversal candlestick pattern that appears at the top of an uptrend. It signals the slowing down of upward momentum before a bearish move lays the foundation for a new downtrend.

evening star pattern

HOW TO IDENTIFY AN EVENING STAR ON FOREX CHARTS

Identifying the Evening Star on forex charts involves more than simply identifying the three main candles. What is required, is an understanding of previous price action and where the pattern appears within the existing trend.

  1. Establish an existing uptrend: The market should be exhibiting higher highs and higher lows.
  2. Large bullish candle: The large bullish candle is the result of large buying pressure and a continuation of the existing uptrend. At this point traders should only be looking for long trades as there is no evidence of a reversal yet.
  3. Small bearish/bullish candle: The second candle is a small candle – sometimes a Doji candle – that presents the first sign of a fatigued uptrend. Often this candle gaps higher as it makes a higher high. It does not matter if the candle is bearish or bullish as the main takeaway here is that the market is somewhat undecided.
  4. Large bearish candle: The first real sign of new selling pressure is revealed in this candle. In non-forex markets, this candle gaps down from the close of the previous candle and signals the start of a new downtrend.
  5. Subsequent price action: After a successful reversal, traders will observe lower highs and lower lows but should always manage the risk of a failed move through the use of well-placed stops.
Bearish Evening Star Candle formation

Traders will often look for signs of indecision in the market where buying pressure subsides and leaves the market somewhat flat. This is the ideal place for a Doji candle to appear.

Evening Star Doji

Doji candles can be observed as the market opens and closes at the same level or very close to the same level. This indecision paves the way for a bearish move as bears see value at this level and prevent further buying. The appearance of the bearish candle after the Doji provides this bearish confirmation.

evening star doji candle

WHAT ABOUT THE MORNING STAR

The bullish version of the Evening Star is the Morning Star and it signifies a potential turning point in a falling market (bullish reversal pattern). The same analysis applied to the Evening Star can be implemented with the Morning Star however, it will be the opposite direction.

HOW TO TRADE THE EVENING STAR CANDLESTICK PATTERN

The Evening Star pattern can be observed in the EUR/GBP chart below, where there is an established uptrend leading up to the formation of the reversal pattern.

Looking at the chart, once the formation has completed, traders can look to enter at the open of the very next candle. More conservative traders could delay their entry and wait to see if price action moves lower. However, the drawback of this is that the trader could enter at a much worse level, especially in fast moving markets.

Targets can be placed at previous levels of support or previous area of consolidation. Stops can be placed above the recent swing high, as a break of this level would invalidate the reversal. Since there are no guarantees in the forex market, traders should always adopt soundrisk management while maintaining a positive risk to reward ratio.

Trading the Evening Star EUR/GBP

When trading the Evening Star on forex markets, the price will very rarely gap like they do with stocks and so the three-candle pattern usually opens very close to the previous closing level.

HOW RELIABLE IS THE EVENING STAR IN FOREX TRADING?

The Evening Star, like most candlestick patterns, should be assessed in line with the current trend and whether there is supporting evidence in favour of the trade, when looking at an indicator. Below are the advantages and limitations of the Evening Star pattern:

ADVANTAGESLIMITATIONS
Occurs frequently in the forex marketA failed reversal is possible, and price could move further up
The pattern presents well-defined entry and exit levels
Evening Stars are easy to identify

How to read candlestick charts -class for intermediate traders

READING CANDLESTICK CHARTS – TALKING POINTS:

  • Candlestick charts differ greatly from the traditional bar chart
  • Traders generally prefer using candlestick charts for day-trading because they offer an enjoyable visual perception of price
  • It’s important to understand the key components of a candle, and what they indicate, to apply candlestick chart analysis to a trading strategy

WHAT IS A CANDLESTICK CHART?

A candlestick chart is simply a chart composed of individual candles, which traders use to understand price action. Candlestick price action involves pinpointing where the price opened for a period, where the price closed for a period, as well as the price highs and lows for a specific period.

Price action can give traders of all financial markets clues to trend and reversals. For example, groups of candlesticks can form patterns which occur throughout forex charts that could indicate reversals or continuation of trends. Candlesticks can also form individual formations which could indicate buy or sell entries in the market.

The period that each candle depicts depends on the time-frame chosen by the trader. A popular time-frame is the daily time-frame, so the candle will depict the open, close, and high and low for the day. The different components of a candle can help you forecast where the price might go, for instance if a candle closes far below its open it may indicate further price declines.

INTERPRETING A CANDLE ON A CANDLESTICK CHART

The image below represents the design of a typical candlestick. There are three specific points (open, close, wicks) used in the creation of a price candle. The first points to consider are the candles’ open and close prices. These points identify where the price of an asset begins and concludes for a selected period and will construct the body of a candle. Each candle depicts the price movement for a certain period that you choose when you look at the chart. If you are looking at a daily chart each individual candle will display the open, close, upper and lower wick of that day.

A red and a blue candlestick with open and close wicks

Open price:

The open price depicts the first price traded during the formation of the new candle. If the price starts to trend upwards the candle will turn green/blue (colors vary depending on chart settings). If the price declines the candle will turn red.

High Price:

The top of the upper wick/shadow indicates the highest price traded during the period. If there is no upper wick/shadow it means that the open price or the close price was the highest price traded.

Low Price:

The lowest price traded is the either the price at the bottom of the lower wick/shadow and if there is no lower wick/shadow then the lowest price traded is the same as the close price or open price in a bullish candle.

Close Price:

The close price is the last price traded during the period of the candle formation. If the close price is below the open price the candle will turn red as a default in most charting packages. If the close price is above the open price the candle will be green/blue (also depends on the chart settings).

The Wick:

The next important element of a candlestick is the wick, which is also referred to as a ‘shadow’. These points are vital as they show the extremes in price for a specific charting period. The wicks are quickly identifiable as they are visually thinner than the body of the candlestick. This is where the strength of candlesticks becomes apparent. Candlesticks can help traders keep our eye on market momentum and away from the static of price extremes.

Direction:

The direction of the price is indicated by the color of the candlestick. If the price of the candle is closing above the opening price of the candle, then the price is moving upwards and the candle would be green (the color of the candle depends on the chart settings). If the candle is red, then the price closed below the open.

Range:

The difference between the highest and lowest price of a candle is its range. You can calculate this by taking the price at the top of the upper wick and subtracting it from the price at the bottom of the lower wick. (Range = highest point – lowest point).

Having this knowledge of a candle, and what the points indicate, means traders using a candlestick chart have a clear advantage when it comes to distinguishing trendlines, price patterns and Elliot waves.

Bar Chart vs Candlestick Chart

As you can see from the image below, candlestick charts offer a distinct advantage over bar charts. Bar charts are not as visual as candle charts and nor are the candle formations or price patterns. Also, the bars on the bar chart make it difficult to visualize which direction the price moved.

Difference between bar chart and candle chart

HOW TO READ A CANDLESTICK CHART

There are various ways to use and read a candlestick chart. Candlestick chart analysis depends on your preferred trading strategy and time-frame. Some strategies attempt to take advantage of candle formations while others attempt to recognize price patterns.

Interpreting single candle formations

Individual candlesticks can offer a lot of insight into current market sentiment. Candlesticks like the Hammer, shooting star, andhanging man, offer clues as to changing momentum and potentially where the market prices maytrend.

As you can see from the image below the Hammer candlestick formation sometimes indicates a reversal in trend. The hammer candle formation has a long lower wick with a small body. Its closing pricing is above its opening price. The intuition behind the hammer formation is simple, price tried to decline but buyers entered the market pushing the price up. It is a bullish signal to enter the market, tighten stop-losses or close out a short position.

Traders can take advantage of hammer formations by executing a long trade once the hammer candle has closed. Hammer candles are advantageous because traders can implement ‘tight’ stop-losses (stop-losses that risk a small amount of pips). Take-profits should be placed in such a way as to ensure a positive risk-reward ratio. So, the take-profit is larger than the stop-loss.

Hammer formation showing stop loss

Recognizing price patterns in multiple candles

Candlestick charts help traders recognize price patterns that occur in the charts. By recognizing these price patterns, like the bullish engulfing pattern or triangle patterns you can take advantage of them by using them as entries into or exit signals out the market.

For example, in the image below we have the bullish engulfing price pattern. The bullish engulfing is a combination of a red candle and a blue candle that ‘engulfs’ the entire red candle. It is an indication that it could be the end of a currency pairs established weakness. A trader would take advantage of this by entering a long position after the blue candle closes. Remember, the price pattern only forms once the second candle closes.

As with the hammer formation, a trader would place a stop loss below the bullish engulfing pattern, ensuring a tight stop loss. The trader would then set a take-profit. For more forex candlestick charts check our forex candlesticks guide where we go in depth into the advantages of candlestick charts as well as the strategies that can be implemented using them.

Bullish engulfing pattern

FURTHER TIPS FOR READING CANDLESTICK CHARTS

How to Choose the Best Forex Strategy

Forex trading is all about eliminating the losing trades and achieving more winning ones.

This is largely achieved thanks to proven Forex trading strategies. Using these strategies, a trader develops for himself a set of rules that help to take advantage of Forex trading.

How to Choose the Best Forex Strategy

Quite often, traders will rely on trading strategies that haven’t been tested thoroughly, setting themselves up for a failure. The truth is, you can spend hours searching all over the internet for the right strategy – and have no luck finding one.

The only solution is to try out the leading strategies for yourself and see what actually works.

Forex trade strategies and goals

Before discussing trading setups and possible strategies, we need to first understand why one would consider trading Forex in the first place. There are two main reasons: hedging and speculation.

Hedging refers to companies protecting themselves from losses. They get their daily profits from any overseas country (that has paid revenue in a foreign currency). Then, they transfer it back to their own country, expecting fluctuation in the currency.

This practice isn’t really relevant to Forex strategies.

On the other hand, speculation refers to predicting a move that a company might make in a certain situation. If done correctly, these predictions greatly improve trading results.

Speculation is what day trading is all about. With the help of decent strategies, you can progress in the Forex trading world and ultimately develop your own trading strategy. The downside is that this is a time-consuming and difficult process.

The good news is that there are pre-made strategies available for you to try.

Although it is better to play it safe, especially if you’re new to the game, you need to change your tactics from time to time. This may allow you to see a profit margin you could have missed otherwise.

What is the best Forex trading strategy?

Here we have a few methods that will help you quickly change tactics and gain pips.

We’re going to provide you with an overview of strategies that have worked for many years, so that you can research the ones that are of interest to you. These are the Forex trading strategies that work, and they have been proven to work by many traders.

The Bladerunner Trade

This is suitable for all timeframes and currency pairings. It is, at this moment, one of the trending strategies in the market. The Bladerunner Trade is a price action strategy.

Daily Fibonacci Pivot Trade

This trade uses daily pivots only. However, it can be extended to a longer timeline. It combines Fibonacci retracements and extensions. Fibonacci trade can incorporate any number of pivots.

Bolly Band Bounce Trade

This strategy is perfect for a ranging market. If you use it in combination with confirming signals, it works really well. If you are interested in Bollinger Bands strategy, this one is definitely worth checking out.

Forex Overlapping Fibonacci Trade

These strategies are a favourite among many traders. The reliability tends to be a bit lower, but used in combination with appropriate confirming signals, they become extremely accurate.

The Pop ‘n’ Stop Trade

Trying to chase the price when it goes upside rarely works. That is, unless you know this trick. This Forex trading strategy gives you a simple tip so you know whether the price will continue to rise or decrease.

Trading the Forex Fractal

This is more of a concept rather than a strategy, but you need to know this if you want to understand what the prices are doing. This offer you a lesson in market fundamentals, which will really help you to trade more effectively.

Currency trading strategies are a game of trial and error. It may be worth trying out the strategies from list above to see if any work for you. However, we will look at two further strategies which tend to be more common than the ones previously mentioned.

What’s more, they have been consistently proven to work.

Scalping in a nutshell

Many consider scalping to be tiresome and time-consuming. Indeed, not every trader can successfully pull it off. It may really seem that scalping takes the fun out of the best Forex strategy.

On the other hand, it really does work.

If you are on the lookout for a reliable Forex strategy, this might be your safest choice. As a day trader, you will dip in and out of the market once or twice a day and always carry a position into another period. Ideally, the profit will come back.

If you’re a savvy scalper, this process is usually far more frenetic. You will trade in and out of the Forex markets several times per day. The profit margins may appear small but they’re also steady.

The more you scalp, the more you will make.

For example, if you trade EUR/USD pair and the price of either currency jumped up 20 pips, you get a slight profit for taking an action.

The result is a tiny profit, but that is a profit made in a single minute. The amount and consistency of your overall profits depend on your commitment and reflexes.

If scalpers want to truly take advantage of the news releases, they should wait for the most important ones. When you scalp, you need to remember when GDP, unemployment figures and inflation rates are about to be released.

These factors affect trading strategies, particularly in the currency trading market, where scalping can be most profitable.

Positional trading – consistent Forex trading strategy

While scalping can certainly teach you to trade the currency market, it takes a lot of time and effort. When you scalp, you have to sit in front of the computer for long periods of time.

Positional trading is an interesting way to trade Forex online. While it can take you only a few hours a week, it can provide you with quite extensive profits.

So how does positional trading work?

Positional trading is all about having your positions opened for a long period of time, so you can catch some large market moves. The rule of thumb is to avoid using high leverage and keep a close eye on the currency swaps.

Sometimes these swaps can cost you more than your actual profit.

With positional trading, you can learn not only Forex trading strategies but also the skills you need to become successful. It is a good method of achieving high profits, but it can also put your emotions to test.

Traders may feel the stress from having their funds affected by short term moves. Quite often, traders will have to fight the urge to close their trade when it’s losing points.

With positional trading, you have to dedicate your time to analysing the market and predicting potential market moves. However, there is almost no time spent on the execution of your trading strategy.

Simply start by picking up the pair you know the most about. Calculate the possible volume of your transaction, see what the swap is and how you can break even, analyse the best moment to enter the trade.

And when this moment comes, go for it.

Increase your forex profit by this pivot price action logic

Pivot Points are a type of support and resistance levels that are used by many intraday and short term traders. When trading pivot points, many of the same rules are in force as with other types of support and resistance trading techniques.

Many traders keep a watchful eye on daily pivot points, as they are considered to be key levels at the intraday timeframe.  We will go through the basic aspects of Forex Pivot Points and we will discuss a couple trading strategies that can be used with daily pivot points

What are Forex Pivot Points?

Forex pivot points are calculated horizontal price levels on the chart. These levels show potential areas where the price can reverse, especially during the first touch of these levels. Many Forex traders make their intraday trading decisions based on daily pivot levels, and as such it is important for intraday traders to watch price action at these levels closely.

How to Calculate Pivot Points

The Standard Pivot point calculation is quite simple. It requires only three numbers – close, high, and low.

We should first calculate the main daily pivot point.  The formula for this:

Pivot Point (PP) = (Daily High + Daily Low + Close) / 3

Since the Forex market is a 24/5 market, there is some confusion as to which time to use for the daily market opening and closing. Most forex traders use the 11:59 PM (23:59) GMT for Forex market closing time and 12:00 AM (00:00) GMT for Forex market opening time. By doing this you can separate the daily trading sessions from each other.

When you get the PP, you can start calculating the further upper and lower pivot points. These are called first, second, third pivot resistance levels, and first, second, third, pivot support levels.

Calculating the First Pivot Resistance and Support

Since you now have the basic pivot point, you can now calculate the first support and resistance.

R1 = (2 x Pivot Point) – Daily Low

S1 = (2 x Pivot Point) – Daily High

Calculating the Second Pivot Support and Resistance

R2 = Pivot Point + (Daily High – Daily Low)

S2 = Pivot Point – (Daily High – Daily Low)

Calculating the Third Pivot Point Support and Resistance

R3 = Daily High + 2 x (Pivot Point – Daily Low)

S3 = Daily Low – 2 x (Daily High – Pivot Point)

We have gone thru the calculations above so that you can understand how these levels are calculated. We will now discuss some quick ways to calculate pivot points without having to do the manual calculations daily.

Adding Pivot Points to Your Chart

When you apply the basic pivot point and the three support and resistances, there will be 7 different levels. As you have seen above, it can be a bit tedious to perform the calculations manually. There are different options to get the pivot points without doing the calculations above manually.

Pivot Points Calculator

There are many online pivot point calculators on the net. When you open a pivot point calculator, you will be required to add the three price action variables. These are the daily high, the daily low and the close. When you add these three, you will simply click on a “calculate” button and you will instantly get your pivot points. Once you have that, then you could just plot the pivot lines on your trading chart within your trading platform.

Pivot Point Indicator

Most of the trading software available today will have a pivot indictor that will calucatate these levels for you automatically and plot them on your chart. First, check the list of indicators your trading platform offers. If you don’t have a pivot indicator there, you should do some research.

You can find many Pivot Point Indicators online, which you could simply add to your platform. Browse the net and you will definitely find a pivot point indicator available usually for free somewhere. You may have to import the indicator and then extract the files in the indicators folder of your trading platform. Once you have done this, you will be able to apply the pivot point indicator directly on your chart. When you plot your pivot point indicator on your chart, you should see something like this:

EURUSD M30 Pivot Points

This is the 30 minute chart of the EUR/USD March 2, 3, and 4, 2016. The horizontal lines on the chart are the pivot points. The blue line is the central pivot point. The lines above the main pivot point are R1, R2, and R3. The lines below the blue line are S1, S2 and S3, (S2 and S3 are not visible). We also put three vertical lines on the chart. These three lines separate the different trading days. Notice that the pivot levels of every trading day are lined differently. This is so, because each trading day has different daily high, low and close values. In this manner, the pivot levels are different too. This is why there is a rapid switch in the levels of the pivot lines for every trading day.Learn What Works and What Doesn’t In the Forex Markets…

Trading Pivot Points

There are few basic rules when trading pivot points.

  • Be bearish when the price is below the main pivot point.
  • Be bullish when the price is above the main pivot point.
  • Go long if the price bounces from S1, S2, or S3.
  • Go short if the price bounces from R1, R2, or R3.

Since we have discussed the structure of the pivot points and the way they are calculated, it is now time to demonstrate pivot trading using some chart examples. Have a look at the image below:

USDJPY Pivot Points Price Action

This is the hourly chart of the USD/JPY for Feb 29 – Mar 4, 2016. The chart shows the pivot points’ price action for 5 consecutive days.

The circles show moments when the price consolidates and hesitates in the area of a pivot point. The arrows show moments when the price finds support or resistance around a pivot point level.

In this example we see price hesitate around a level 4 times and in 8 instances we have a price reversal after interaction with a pivot point.

Pivot Trading Strategy

Now that we have seen pivot points in action, we will now turn to applying some pivot point trading strategies.

Trading Pivot Points with Price Action

Firstly, I will show you how to use pivot points as a part of a pure price action trading strategy, without the assistance of any additional trading indicator. We will rely on regular breakout rules to enter the market. If we enter the market on a breakout, we will put a stop loss below the previous pivot point. We will target the second pivot point level after the breakout.

Take a look at this chart:

GBPUSD Pivot Points Trading with Price Action

This is the H1 chart of the GBP/USD for Jan 28 – Feb 5, 2016. There are two breakouts through the PP level, which could be traded.

The first breakout through the blue pivot line comes in the beginning of the chart. One could short the GBP/USD.  A stop loss order should be put right above R1 – the first pivot level above the main pivot point. The target should be S2 – the second level below the main pivot point.

It is very important to emphasize, that if your trade is held overnight, then the pivot points will likely change for the next day. In this manner, your stop loss and target may need to be adjusted to reflect the new levels. 

As per the trade example above, about six hours after the short trade in the GBP/USD Forex pair, the price reaches the target, which was about a 138 pips profit potential.

The price starts increasing after reaching the target. In the middle of the next trading day, the GBP/USD breaks the main pivot point in bullish direction. This is a good long position opportunity. If you want to take this long opportunity, you should place your stop loss order right below S1, which is not visible on the picture in this particular moment. At the same time, your target should be on R2.

After breaking the main pivot point the price starts increasing and it breaks through R1. On the next day, the pivot levels are different. The price decreases to the central pivot point and it even closes a candle below.

However, the candle is a bullish hammer, which is a rejection candle formation. This hints that the trade should stay open. Furthermore, the stop loss below S1 is still untouched. The price then starts a consolidation which lasts until the end of the trading day.

When the next trading day comes, the pivot points are readjusted again and they are tighter. The main pivot point is higher. The price tests the main pivot point as a support again and bounces upwards. Then the GBP/USD enters an uptrend and the target at R2 is reached.

Notice that after reaching the target, the GBP/USD closes a candle above R2. This implies that the uptrend might continue, which puts on the table a third trading opportunity. If you go long here, you should place a stop right below R1. Since the trade is long and it is open on a breakout through R2, the target limit order should be placed somewhere above R3 (we have no R4 level). You could also use your own price action rules to determine how long you should stay in the trade.

Trading Pivot Points with MACD

In this pivot trading strategy I will include the Moving Average Convergence Divergence (MACD) indicator. The point of this strategy is to match a pivot point breakout or bounce with a MACD crossover or divergence. When you match signals from both indicators, you should enter the market in the respective direction. A stop loss should be used in this trading strategy the same way as with the previous strategy. Your stop should be located on the previous pivot level. You should stay in the trade until the MACD provides an opposite crossover. The image below will make the picture clearer for you.

USDCAD Pivot Points +MACD trading

This is the H1 chart of the USD/CAD for Feb 19 – 26, 2016. The image shows one long and two short position opportunities. Signals are based on pivot point breakouts and MACD crosses.

We start with the first trading opportunity which is short. MACD lines cross downward and we get the first signal for an eventual downtrend. Few hours later we see the price breaking through the main pivot point, which is the second bearish signal in this case. One can now short the USD/CAD based on this trading strategy. A stop loss should be put right above the R1 pivot point as shown on the image.

The price starts a downward movement. However, we see a correction to the main pivot point (first black arrow). The price then bounces from the PP level and the decrease continues. The second hesitation in the bearish trend leads to a bullish cross of the MACD lines and the trade should be closed. One could have made 53 pips from this trade.

Notice that few hours after the bullish MACD cross, the price switches above the main pivot point. There are two matching signals coming from the PP and the MACD. This looks like a good long opportunity which could be traded. In this case the stop loss should be located right below the S1 pivot point. The price starts increasing and the MACD starts trending in a bullish direction. In the middle of the next trading day the MACD lines interact in the bearish direction. This should be taken as a closing signal. The long trade would have generated profit of 57 pips.

The price increases to R1 and starts approaching this resistance level. Suddenly, the USD/CAD bounces in a bearish direction. At the same time, the MACD lines cross in bearish direction as well. This is another match of two signals from the pivot points and the MACD, which is a short position opportunity.

The price immediately switches below the PP level and keeps decreasing rapidly. A correction occurs afterwards and the MACD lines almost cross in bullish direction. However, there is no bullish reading coming from the MACD and the trade should be held. The prices continues to move downward. The next hesitation in the bearish trend leads to a bullish cross in the MACD, which should be taken as an exit signal. This trade would have generated profit of 235 pips in about two days.

Conclusion

  • Pivot points are important intraday chart levels, which act as support and resistance areas.
  • Pivot points are considered very objective, since they are calculated using a precise formula.
  • The basic pivot point configuration include a basic pivot level (PP) with three resistance levels above (R1, R2, and R3), and three support levels below (S1, S2, and S3).
  • Pivot points are calculated using the daily high, low and close of the Forex pair.
  • In order to set daily time frames, many traders set the open-close of the Forex trading day to:
    • Start: 00:00 AM GMT
    • End: 11:59 PM GMT
  • Every trading day the PP, R1, R2, R3, S1, S2, and S3 levels change their location, because the daily high, low and close are different every day.
  • There are many pivot point calculators, which would facilitate significantly the way you extract your pivot data.
  • There are ready to use pivot indicators, which adapt to your trading platform.
  • You should always use a stop loss order when you trade pivot points. A good place to put your stop at is the previous pivot level from the one you use to enter the market.
  • You should take profit after the price goes through two pivot areas, or based on other price action clues or a confirming indicator signal.
  • Two methods for trading pivot points are:
    • Trading Pivot Points using Price Action
    • Trading Pivot Points with MACD

Essential For Your Trade- 123 Forex Trading Strategy

Powerful 123 Forex Trading Strategy

The 123 Forex trading strategy is based on price action and normal Forex market structure that any trader should know.  The 1 2 3 trading strategy is used as a continuation trading setup that is designed to take advantage of the trend of the market.

The failure of the 123 trading strategy is also a trade setup but can also warn you of potential price consolidation in the market or even a trend reversal in whatever Forex pair you are watching.

Keep in mind that even though it is a continuation pattern upon confirmation, it is also a reversal pattern from the short term trend direction.

1 2 3 Trading Pattern Formation

In any trending market, there is a pattern of higher highs and higher lows.  In order for the trend to the upside to remain active, each successive impulse swing must take out the point 2 in the formation.  When price surpasses the price at #2, the trader can use that as confirmation that the 1 2 3 chart pattern is present.

This is a line chart that explains the concept of the 1 2 3 trading pattern and in this case, we are assuming an up trending market

1 2 3 Trading Strategy

1 2 3 Trading Strategy

Let’s walk through each number and this pattern should be familiar to any trader who’s been looking at charts for a while.

  1. When an uptrend pulls back, it will put in a low and from that low, price continues to rally.
  2. This acts as short term potential resistance.  Price rallies to this point and then begins to retrace back in the direction of the price at #1.  We DO NOT want to see price retrace all the way to the price at #1.  If it does, we will consider that to be the formation of a double bottom chart pattern and would trade that according to the trading plan you have set up for that price pattern.
  3. This level is also considered a #1 only when the price level at #2 is broken.  This price point is the level at which the corrective move completes and the price reversal to the upside begins.

Please note that the 1 2 3 price pattern is only confirmed once the high at point #2 is taken out by price.

You can also see that the 1 2 3 trading strategy is taking advantage of the stair step nature of the market that is needed if a trend is going to continue.  It is at the confirmation of the patter that a trader can place a conservative trading position in the market

1 2 3 Chart Pattern By The Numbers

In an uptrend market situation, price will make 3 points

  • Point 1 is the lowest low point, forms a support level.
  • Point 2 will be the peak or the highest point, forms a level that we consider as potential resistance
  • Point 3 will be the 2nd low point, a support level ( which must be higher that the point 1 which is the lowest low point ).
  • The breakout of price above point 2  signals the continuation of the uptrend.

In a downtrend market, the 1 2 3 chart pattern forms when:

  • Point 1 becomes the highest peak when price finds resistance and moves down.
  • Point 2 becomes the lowest low point (forms support) and price moves up
  • Finds another resistance at point 3.
  • when price breaks the  point 2 support level,it indicates that the market is most likely to continue downward

Trading Strategy Trading Plan

Let’s take a look at a potential trading method to trade the 1 2 3 trading strategy.  We will look at a conservative method for those traders that need a little extra confirmation in their trades.

Keep in mind there is a cost involved.  The longer you wait to get involved in a trading position, the larger you will have to make your stop loss.

123 Trading Plan

123 Trading Plan

Trade Setup 1

You should be familiar with the numbers and what they represent on the chart.  We can see that price rallied from point 3, found resistance at point 2 and retraced.  We now have a double bottom chart pattern and just as the 1 2 3 trading strategy needs a breach of #2 to confirm the pattern, so does the double bottom.

If you do get a double bottom after a move in price, that could signify weakness in the market.  If bulls were fully in chart during the retrace at 2, we should not see two shots at the level #3.

Price breaks above #2 and you can either enter at the breakout or, my preference, take a position at the close of the candlestick to confirm a true break.  You can also put an order to buy slightly above the candlestick that broke the #2 level.

Your stop loss should be below #2 with buffer room to allow for noise.  You can also, my preference is coming, use a 14 period Average True Range x 2.

Trade Setup 2

Price rallies from #1 and gives us a strong reversal candlestick at #2.  Once price begins to retrace, put this currency pair on your radar.  Price find support at #2 (inside the previous consolidation pattern from trade #1) and shows strength as it rallied to #2

Once price shatters the #2 price zone, enter at the close of the daily candlestick (or whatever time frame you are using) and use an ATR stop.  The average true range stop for this trade would actually be in the middle of the candlestick that printed just before the breakout candlestick.

Trade Setup 3

Each trader should understand this pattern by now so let’s focus on the range that is occurring. We have most variables need for the 1 2 3 trading strategy but price is forming a range near the level at #3.

That is NOT something we want to see for a clean 1 2 3 chart pattern.

When price is basing in this fashion, it shows that the side that was dominant, in this case bulls, have tired.  As a trader for years, I have seen the following occur:

  1. Price trends nicely
  2. Weakness shows up in this fashion
  3. Traders will take another run to the upside, break #2 and then see this fail back inside

This formation of the consolidation is also a great trade entry into the potential of the 1 2 3 chart pattern continuing.

Front Running

Front Running

We can position early in the 1 2 3 formation when we have basing occurring.  Ideally, we would like to see some form of basing near the resistance level (red line).  You can see the green dashed line and then price rockets to resistance.

That is not conducive to a sustained break of resistance.

The more favorable setup is to have either basing near the extreme or a slight pullback in price which we see with orange box.  The break out then occurs after that pullback.

Those types of breaks are more effective and see if you can understand why.  Some would think the first break would carry more weight because the drive started midway in the range.

But traders who positioned lower will also look for scalping Forex trades at the top of the range – is that not how you play a range??  Yes.  The breakout that occurs is driven by traders who went long at the bottom of the range.

Let’s see some detail in this chart

  1. Price could not rally far from the low which is showing the 1 2 3 chart pattern – the stair stepping in a trend – is under attack.  Price can’t break lows so traders go into range trading mode
  2. The formation of this smaller range allows traders to position with a tighter stop loss just under the small range.
  3. You can see there was a drive to this level and then a very weak candlestick shows up.  This is either traders positioning short in the range or the longs taking profits.

That is the type of thinking you want to have as a trader.  Do not trade blind!

What Is Your Entry Strategy?

As discussed, you can enter at the close of the break out candlestick (signal candlestick) or entering your trading position at a break of the high.

Some traders may want to use a multiple time frame approach and enter on a lower time frame.  In my own trading and in my years as a trader, I look to simplify.  Entering at close or breaks of support levels or resistance levels (highs and lows of breakout candlesticks) is my favored entry

Taking Your Profits

Some traders would like to see specific price targets to add to their trading plan.  Other traders see the power of trailing their stop loss to take as much as the market is willing to give.

You can use structure targets such as higher resistance levels in an uptrend.

You can use legs 1-2=3-4 which suits the 1 2 3 trading strategy.

One to One Targets

One to One Targets

I color coded each swing so you can see where I am measuring from.  I use the 3 point Fibonacci tool and set it to the 100%.  You can see the first two trades nailed the targets.  The third trade hits the .618 Fibonacci level which is quite popular when used to portion out swing points.

Summary

The 1 2 3 trading strategy is a pure price action trading method that uses a sound approach to trading.

No trading indicators are required although I do suggest the ATR for stop loss placement.

You must have a proper risk protocol as part of your trading plan.

The SMA Forex Trading Strategy-For Beginners

The SMA Forex Trading Strategy

One Forex strategy that you might like to try is based on a straightforward indicator known as theSimple Moving Average (SMA). The SMA Forex trading strategy aims to provide the highest possible return for the amount of risk assumed. The SMA measures a security’s value during a specific time frame, to give traders a better sense of when to buy and sell a currency pair.

For example, if you set up a 12-period SMA with 15-minute intervals, any increase in the currency pair’s value above the 12-period SMA could present a signal to buy. Likewise, should the currency pair’s price fall below the 12-period SMA, it could be a signal to sell. This popular Forex trading strategy may be good for beginners as it can be used with any time frame, and with most trading instruments.

Additionally, you can combine the SMA with helpful tools, like indicators. Traders may choose to use the SMA as the foundation of their strategy, and then build from there. No matter what you do, remember to test all Forex trading strategies on a Demo Account first, before going live. One way beginners can develop their own approach is to test more understandable SMA-based trading strategies, and then add other indicators when and if consistently desirable results are achieved.

Optimise Potential Profit with Positional Trading

You cannot predict which strategy will provide you with the most success, or indeed any at all. However, positional trading could be a potentially profitable Forex strategy. Positional trading involves holding positions over the long term – usually, between one month and a year. It has the advantage of being largely hands-off. However, it requires a long-term plan, and the ability to predict future market direction. To get started with positional trading, you must first pick an asset. When determining which currency pair to use, there are three factors you need to consider:

High Long-Term Volatility

Volatility is crucial for turning a profit. You need to pay for ‘SWAPs’ every night in order to hold a trade open, and you could easily suffer a loss on any given night, unless your currency pair experiences some notable price movements within a few months. One way to increase the odds of success is to select currency pairs that may feel influence from:

  • Upcoming political events
  • Economic events in the near future.

Low Short-Term Volatility

A currency pair with low short-term volatility is more likely to move slowly in the direction of your trade, instead of experiencing sharp fluctuations that might prompt you to close your position.

Use Low Margin

While Forex traders frequently trade with very high leverage, this approach is not suitable for positional trading. When it comes to positional trading, keep one thing in mind – the less leverage you use, the better it may be. To determine how much margin to use for your Forex strategy, consider the following variables:

  • The amount of money you have outside your trading account – remember to only trade with risk capital
  • How much leverage will provide the best risk-reward ratio

Benefits of Scalping

Profitable Forex strategies. Scalping

Source: EURUSD Chart – Data Range: May 2016 – An example of scalping – Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.

While positional trading may (or may not) produce great benefits, trading can appeal to many different types of people, for different reasons. Some traders enjoy spending time watching the markets, as doing so gets their heart beating and their adrenaline flowing. One Forex strategy that may provide this adrenaline rush is scalping. The idea behind the scalping strategy is to complete a large number of trades that individually generate small rewards – between five to ten pips each.

Traders usually keep these positions for one to five minutes, and spend all day monitoring buy/sell signals. Some professional traders have generated great returns with this approach, including Paul Rotter. Mr. Rotter attained legendary status with scalping and earned the nickname ‘The Flipper’ for his quick trading actions. Rotter would open buy/sell positions simultaneously on the derivatives exchange ‘Eurex’. When traders responded, he would quickly scalp profit from one alternative.

One crucial factor in Rotter’s success was to closely watch the order book. To cultivate your own unique and efficient Forex trading strategy, consider these key variables:

  • Your desired risk-reward ratio
  • Your tolerance for stress
  • How much time per day you want to spend trading

Most importantly, only use techniques you fully understand and never stop improving your strategy. A free Demo account is perfect for testing new things out risk-free, and for working on your overall performance.

Fibonacci Pivot Strategy-For daily traders

The Another one of our free forex strategies trades a confluence between daily Pivots and Fibonacci retracement levels.

The Daily Fibonacci Pivot Strategy uses standard Fibonacci retracements in confluence with the daily pivot levels in order to get trade entries. My preferred parameters are the 38% or 50% Fibonacci levels in confluence with the daily central pivot. The examples following show entries at the 38%, 50% and 62% Fibonacci retracement levels in confluence with the daily central pivot.

As with all free forex strategies, there are many possible interpretations and variations. My particular take on this strategy is as follows:

  • look for an entry on any currency pair where the average true range for the last five day period has been exceeded in the previous day’s trading session
  • at the start of the current trading session draw fibs:
  • look for a confluence of Fibonacci retracement levels with the daily central pivot
  • If price retraces to the confluence identified, either enter at market or wait for a confirmatory candle signal to occur at the confluence before entry. Obviously, it is more risky to enter before getting the confirmatory signal, but such an approach gives a greater possible reward to risk ratio.

Let’s have a look at a few charts to see how this works.

The first chart shows a long entry at the confluence of the 38% Fibonacci retracement and the daily central pivot:

Free Forex Strategies: Fibonacci/Pivot Long Entry 1

It was possible to enter either way here, either by buying at the first touch of that level, or waiting for the morning star candle formation to form. Both entries would have given a possible target at the 127% Fibonacci extension level, which was easily reached.

The suggested stop loss for these trades is behind the Fibonacci level one level away from where you take the trade. In this case it would amount to the 50% retracement level, with a few pips extra thrown in for buffering.

The next trade shows the reverse setup of the previous trade, with a sell occurring at the confluence of the 38% retracement and the daily central pivot:

Free Forex Strategies: Fibonacci/Pivot Short Entry 1

This was a nice set up given the big drop that occurred in the previous trading session. That drop signified a change in sentiment which would have added weight to the decision to sell.

Another example, again, a sell after a long run down the day before:

Free Forex Strategies: Fibonacci/Pivot Short Entry

This time the sell occurs at the 50% retracement level, although it is not in perfect confluence with the daily central pivot. Still, a nice evening star pattern occurred with both the daily central pivot and the 50% retracement level being respected prior to entry,

The last example shows a confluence of the central pivot with the 62% retracement level, plus old lows at the left of the chart:

Free Forex Strategies: Fibonacci/Pivot Short Entry 3

This is an example of the fact that any pivot level can be used in confluence with the daily central pivot. In this case price retraced to once more retest the entry-level on the next day, but you should have had profit taken out of the trade by then, if not having exited at full profit.

As always with any new strategy, and in particular free forex strategies, remember to fully back test and live test in a demo account before going live with this particular play, if you decide it is a good fit for you.

ABCD STRATEGY -YOU MUST NEED TO KNOW ABOUT IT IN YOUR FOREX TRADE

The ABCD is a basic harmonic pattern. All other patterns derive from it. The pattern consists of 3 price swings. The lines AB and CD are called “legs”, while the line BC is referred to as a correction or a retracement. AB and CD tend to have approximately the same size.

A bullish ABCD pattern follows a downtrend and means that a reversal to the upside is likely. A bearish ABCD pattern is formed after an uptrend and signals a potential bearish reversal at a certain level. The rules for trading bullish and bearish ABCD patterns are the same, you will just need to take into account the direction of the pattern you trade and the movement of the market it predicts.

There are several types of ABCD pattern (all the 3 patterns at the picture are bullish).

Screenshot_2.png

In the classic one, the point C should be at 61.8%-78.6% of AB (Use Fibonacci retracement tool on AB: the point C should be close to 61.8%). The point D, in its turn, should be at the 127.2%-161.8% Fibonacci expansion of BC.

Notice that a 61.8% retracement at the point C tends to result in the 161.8% projection of BC, while a 78.6% retracement at the C point will lead to the 127% projection.

There is also the so-called AB=CD pattern. Here CD has exactly the same length as AB. In addition, it takes the market the equal time to travel from A to B as from C to D. As a Result, AB and CD have the same angle. This type of ABCD pattern is seen quite often and is popular among traders.

The third type is when CD is the 127.2%-161.8% extension of AB. CD can be even 2 times (or more) bigger than AB. There actually are some signs that can hint that CD will be much longer than AB. They are a gap after point C or big candlesticks near point C.   

How to trade ABCD pattern

The key thing you should remember is that you can enter the trade only after the price reached the point D.

Study the chart looking at the price’s highs and lows. It may be helpful to use ZigZag indicator (Insert – Indicators – Custom – ZigZag) that marks the chart’s swings.  

Watch the price as it forms AB and BC. In a bullish ABCD, C must be lower than A and should be the intermediate high after the low at B. Point D must be a new low below B.  

When the market arrives at a point, where D may be situated, don’t rush into a trade. Use some techniques to make sure that the price reversed up (or down if it’s a bearish ABCD). The best scenario is a reversal candlestick pattern. A buy order may be set at or above the high of the candle at point D.

Screenshot_3.png

Take profit levels

Here are the target levels for trading the ABCD pattern.  

TP1: 38.2% retracement of AD

TP2: 61.8% retracement of AD

TP3: point A

We recommend using these levels together with support and resistance you identify at the chart using various tools of technical analysis. Don’t forget to have a look at senior timeframes when you hunt for support and resistance levels.  

If the price moved to TP1 fast, the odds are that it will continue towards TP2. On the contrary, if the price is slow to get to TP1, this might mean that it will be the only TP level you’ll get.

There are many cases when the market reversed after AC=CD pattern going beyond point A.

As for Stop Loss, there are no special recommendations. You can put a Stop Loss in line with your risk management rules.

Here’s an example of the ABCD patterns on the chart:

Screenshot_13.png

Conclusion

You can find many ABCD pattern on one chart. The rules for trading each of them are as explained above. Make sure that you know how to apply Fibonacci tools correctly an follow all our tips. 

Pin Bar Trading Strategy

Pin Bar Trading Strategy

The Pin Bar Pattern (Reversal or Continuation)

A pin bar pattern consists of one price bar, typically a candlestick price bar, which represents a sharp reversal and rejection of price. The pin bar reversal as it is sometimes called, is defined by a long tail, the tail is also referred to as a “shadow” or “wick”. The area between the open and close of the pin bar is called its “real body”, and pin bars generally have small real bodies in comparison to their long tails.

The tail of the pin bar shows the area of price that was rejected, and the implication is that price will continue to move opposite to the direction the tail points. Thus, a bearish pin bar signal is one that has a long upper tail, showing rejection of higher prices with the implication that price will fall in the near-term. A bullish pin bar signal has a long lower tail, showing rejection of lower prices with the implication that price will rise in the near-term.

pinbar1

How to Trade with Pin Bars

When trading pin bars, there are a few different entry options for traders. The first, and perhaps most popular, is entering the pin bar trade “at market”. That simply means you enter the trade at the current market price.

Note: the pin bar pattern must be closed out before entering the market based on it. Until the bar is closed as a pin bar pattern, it’s not really a pin bar yet.

Another entry option for a pin bar trading signal, is entering on a 50% retrace of the pin bar. In other words, you would wait for price to retrace to about the halfway point of the entire pin bar’s range from high to low, or its “50% level”, where you would have already placed a limit entry order.

A trader can also enter a pin bar signal by using an “on-stop” entry, placed just below the low or above the high of the pin bar.

Here’s an example of what the various pin bar entry options might look like:

pinbar2

Trading Pin Bar Signals in a Trending Market

Trading with the trend is arguably the best way to trade any market. A pin bar entry signal, in a trending market, can offer a very high-probability entry and a good risk to reward scenario.

In the example below, we can see a bullish pin bar signal that formed in the context of an up-trending market. This type of pin bar shows rejection of lower prices (note the long lower tail), so it’s called a “bullish pin bar” since the implication of the rejection reflected in the pin bar is that the bulls will resume pushing price higher…

pinbar3

Trading Pin Bars against the Trend, From Key Chart Levels

When trading a pin bar counter to, or against a dominant trend, it’s widely accepted that a trader should do so from a key chart level of support or resistance. The key level adds extra ‘weight’ to the pin bar pattern, just as it does with counter-trend inside bar patterns. Any time you see a point in the market where price initiated a significant move either up or down, that is a key level to watch for pin bar reversals.

pinbar4

Pin bar Combo Patterns

Pin bars can also be traded in combination with other price action patterns. In the chart below, we can see an inside pin bar combo pattern. This is a pattern in which the inside bar is also a pin bar pattern. These inside pin bar signals work best in trending markets like we see below…

pinbar5

The pattern in the chart below could be considered the ‘opposite’ of the inside-pin bar, it’s an inside bar inside a pin bar signal. It’s relatively common to see an inside bar form within the range of a pin bar pattern. Often, a large breakout move will follow an inside bar formed within a pin bar’s range, for this reason, the pin bar + inside bar combo setup is a very potent price action trading pattern, as we can see in the chart below…

pinbar5-1

Double Pin Bar Patterns

It is not uncommon to see back-to-back or “double pin bar patterns” from at key levels in the market. These patterns are traded just like a normal pin bar, except they provide a trader with a little more ‘confirmation’ since they reflect two consecutive rejections of a level…

pinbar6

Pin Bar Trading Tips

  • As a beginning trader, it’s easiest to learn how to trade pin bars in-line with the dominant daily chart trend, or ‘in-line with the trend’. Counter-trend pin bars are a bit trickier and take more time and experience to become proficient at.
  • Pin bars basically show a reversal in the market, so they are a very good tool for predicting the near-term, and sometimes long-term, direction of price. They often mark major tops or bottoms (turning points) in a market.
  • Not every pin bar is going to be one worth trading. The best ones occur in strong trends after a retrace to support or resistance within the trend, or from a key chart level of support or resistance.
  • As a beginner, keep your eyes peeled for daily chart time frame pin bars as well as 4 hour chart time frame pin bars, as they seem to be the most accurate and profitable.
  • Longer tails on a pin bar indicate a more significant reversal and rejection of price. Thus, long-tailed pin bars tend to be a little higher-probability than their shorter-tailed counter-parts. Long-tailed pin bars also tend to see price retrace to near the pin bar’s 50% level more often than shorter-tailed pins, this means they are typically better candidates for the 50% retrace entry discussed previously.
  • Pin bars will show up in any market. Be sure you practice identifying and trading them on a demo account before trading them with real money. Practice makes perfect.

Pin Bar Strategy -may be change your forex trade style!!!

An Introduction To The Pin Bar Forex Trading Strategy and How to Trade It Effectively…

The pin bar formation is a price action reversal pattern that shows that a certain level or price point in the market was rejected. Once familiarized with the pin bar formation, it is apparent from looking at any price chart just how profitable this pattern can be. Let’s go over exactly what a pin bar formation is and how you can take advantage of the pin bar strategy in the context of varying market conditions.

What is a Pin Bar?

The actual pin bar itself is a bar with a long upper or lower “tail”, “wick” or “shadow” and a much smaller “body” or “real body”, you can find pin bars on any stripped-down, “naked” bar chart or candlestick chart. We use candlestick charts because they show the price action the clearest and are the most popular charts amongst professional traders. Many traders prefer the candlestick version over standard bar charts because it is generally regarded as a better visual representation of price action.

Characteristics of the Pin Bar Formation

• The pin bar should have a long upper or lower tail…the tail is also sometimes called the “wick” or the “shadow”…they all mean the same thing. It’s the “pointy” part of the pin bar that literally looks like a “tail” and that shows rejection or false break of a level.

• The area between the open and close of the pin bar is called the “body” or “real body”. It is typically colored white or another light color when the close was higher than the open and black or another dark color when the close was lower than the open.

• The open and close of the pin bar should be very close together or equal (same price), the closer the better.

• The open and close of the pin bar are near one end of the bar, the closer to the end the better.

• The shadow or tail of the pin bar sticks out (protrudes) from the surrounding price bars, the longer the tail of the pin bar the better.

• A general “rule of thumb” is that you want to see the pin bar tail be two/thirds the total pin bar length or more and the rest of the pin bar should be one/third the total pin bar length or less.

• The end opposite the tail is sometimes referred to as the “nose”

pin bar trading strategy

Bullish Reversal Pin Bar Formation

In a bullish pin bar reversal setup, the pin bar’s tail points down because it shows rejection of lower prices or a level of support. This setup very often leads to a rise in price.

Bearish Reversal Pin Bar Formation

In a bearish pin bar reversal setup, the pin bar’s tail points up because it shows rejection of higher prices or a level of resistance. This setup very often leads to a drop in price.

bullish and bearish pin bar reversal diagram

How to Trade a Pin Bar Formation

The pin bar formation is a reversal setup, and we have a few different entry possibilities for it:

“At market entry” – This means you place a “market” order which gets filled immediately after you place it, at the best “market price”. A bullish pin would get a “buy market” order and a bearish pin a “sell market” order.

“On stop entry” – This means you place a stop entry at the level you want to enter the market. The market needs to move up into your buy stop or down into your sell stop to trigger it. It’s important to note that a sell stop order must be under the current market price, including the spread, and a buy stop order must be above the current market price, including the spread. If you need more help on these “jargon” words checkout my free beginners forex course for more.

On a bullish pin bar formation, we will typically buy on a break of the high of the pin bar and set our stop loss 1 pip below the low of the tail of the pin bar. On a bearish pin bar formation, we will typically sell on a break of the low of the pin bar and place a stop loss 1 pip above the tail of the pin bar. There are other stop loss placements for my various setups taught in my advanced price action course.

“Limit entry” – This entry must be placed above the current market price for a sell and below the current market price for a buy. The basic idea is that some pin bars will retrace to around 50% of the tail, so we can look to enter there with a limit order. This provides a tight stop loss with our stop loss just above or below the pin bar high or low and a large potential risk reward on the trade as a result.

pin bar trading entry types

To effectively trade the pin bar formation you need to first make sure it is well-defined, (see pin bar characteristics listed at the top of this tutorial). Not all pin bar formations are created equal; it pays to only take the pin bar formations that meet the above characteristics.

Next, try to only take take pin bars that are displaying confluence with another factor. Generally, pin bars taken with the dominant daily chart trend are the most accurate. However, there are many profitable pin bars that often occur in range-bound markets or at major market turning points as well. Examples of “factors of confluence” include but are not limited to: strong support and resistance levels, Fibonacci 50% retracement levels, or moving averages.

How to trade pin bars from key chart levels

Trading Pin Bar Signals with Support and Resistance Confirmation, is perhaps one of the most effective ways to trade forex, if not thee most effective way to trade. Below, we will show some examples of trading pin bars from key levels. Follow along closely because this is likely to be one of the most powerful Forex trading strategies you will ever learn.

Pin bars are one of the most valuable tools that price action traders have in their Forex trading arsenal. They often form at major market turning points, correction levels, or within a trend as continuation signals. When combined with a strong support or resistance level, pin bars can be one of the most accurate trading signals available. The best pin bar setups occur near confluent levels of previous price action as the market moves in one direction and then regresses back to re-test a previous support or resistance level. We can see in this daily chart of EUR/USD two successive pin bars testing a previous support and resistance level and then resuming downward movement

pinbarswithtrend

Pin bars occur in all market conditions; up trends, down trends, and range bound. The beauty of price action analysis is that it teaches you how to analyze market movement based on inherently generated data; namely price data. Reversal bars taken at confluent levels can act as a map to long-term profits in the forex market. Trader’s can design a highly profitable trading method entirely around pin bars if they so desire. The more confluence added to a pin bar formation the more accurate it becomes. We can see in this daily chart of GBP/USD below a beautiful pin far formed at a previous support/resistance level with the up trend and also at a Fibonacci 50% retrace level. The more confluence you can combine with a pin bar signal the higher its accuracy becomes.

confluentpinbarsignal

Pin bars are adaptable to ever-changing forex market conditions and can be very profitable even in ranging markets. They can be very accurate if the formation is clear and obvious and combined with solid support or resistance confirmation. We can see in the daily chart of EUR/JPY below two very well formed counter-trend pin bars that formed off support in a range bound market that netted some serious gains for traders with a keen eye for price action analysis. Pin bars of this clarity and magnitude can be entered after the close on a market order.

pinbarsoffsupport

Pin bars can be taken at major market turning points counter-trend if they are very well formed. Often times long-term trend changes are set off by large pin bars that can result in some serious gains for traders aware of the potential. The daily GBP/JPY chart below demonstrates how a large, well formed pin bar can tip off traders to longer-term changes in trend direction. Often times trend changes will occur rapidly and form what is called a “V” bottom with the bottom bar being a pin bar.

vshapedreversalpin

When pin bars form at the top or bottom of a consolidating market that is taking a breather after a large directional movement they can often signal trend resumption is near. In the daily chart of USD/CAD below we can see multiple pin bars formed at the top of a range bound market that was most recently in a large down trend. The last pin bar on the right side of the chart set off a very powerful move that resulted in a breakout of the range and subsequent downward trend resumption.

pintrendcontinuation

pin bar reversals are a great price action tool that forex traders can use in all market conditions. They are best played at confluent levels with strong support and resistance confirmation. Pin bars taken with the dominant daily trend are generally more accurate than counter trend pins. However, counter trend pins can set off long-term directional bias changes that can mean serious cash for traders with a trained eye. Pin bars work great at the tops and bottoms of range-bound markets and provide very accurate setups in these conditions.

Examples of the Pin Bar Formation in Action

Here is a daily chart of CAD/JPY, we can see numerous pin bar formations that were very well defined and worked out very nicely. Note how all the pin bar’s tails clearly protruded from the surrounding price action, showing a defined “rejection” of lower prices. All of the pin bars below have something in common that we just discussed, can you guess what it is?

pin bar trading example

If you said that all the pin bars in the above chart are “bullish pin bar setups”, then you answered the question right. Good job!

In the following daily USD/JPY chart we can see an ideal pin bar formation that resulted in a serious move and trend reversal. Sometimes pin bars like this form at significant market turning points and change the trend very quickly, like we see below. The example in the chart below is also sometimes called a “V bottom reversal”, because the reversal is so sharp it literally looks a V…

pin bar definition

Here is an example of a trending market that formed numerous profitable pin bar setups. The following daily chart of GBP/JPY shows that pin bars taken with the dominant trend can be very accurate. Note the two pin bars on the far left of the chart that marked the start of the uptrend and then as the trend progressed we had numerous high-probability opportunities to buy into it from the bullish pin bars shown below that were in-line with the uptrend.

pin bars in trend

Pin bar in range-bound market and at important market turning point (trend change):

In the chart example below, we can see a bearish pin bar sell signal that formed at a key level of resistance in the EURUSD. This was a good pin bar because it’s tail was clearly protruding up through the key resistance and from the surrounding price action, indicating that a strong rejection as well as false-break of an important resistance had taken place. Thus, there was a high probability of a move lower after that pin bar. Note the 50% limit sell entry that presented itself as the next bar retraced to about 50% of the pin bar’s length before the market fell significantly lower…

pin bar 50 percent entry

Pin bar in-line with trend with multiple factors of confluence:

In the chart example below, we are looking at a bearish pin bar sell signal that formed in the context of a down-trending market and from a confluent area in the market. The confluence between the 8 / 21 dynamic EMA resistance layer, the horizontal resistance at 1.3200 and the downtrend, gave a lot of “weight” to the pin bar signal. When we get a well-defined pin bar like this, that has formed at a confluent area or level in the market like this, it’s a very high-probability setup…

pin bar with confluence

Other names you might find pin bars described by:

There are several different names used in ‘classic’ Japanese candlestick patterns that refer to what are basically all pin bars, the terminology is just a little different. The following all qualify as pin bars and can be traded as I’ve described above:

• A bearish reversal or top reversal pin bar formation can be called a “long wicked inverted hammer”, “long wicked doji”, “long wicked gravestone”, or “shooting star”.

• A bullish reversal or bottom reversal pin bar formation can be called a “long wicked hammer”, “long wicked doji”, or “long wicked dragonfly”.