Understanding Candle Patterns: Pin Bar

I want to start another series of blog posts on the topic of candle patterns. You probably know how popular Japanese candles are for those who use technical analysis. In fact, some people trade relying entirely on different candle formations and they make consistent profits doing that. There are virtually hundreds of candle patterns, formations and variations. I only want to analyze a few of them; those that seem to be the most consistent and profitable. The first one we are going to look at is a pin bar candle. A pin bar is a candle that has a long wick either up or down. If the body of the candle at the top, it is a bullish pattern, if the body of the candle at the bottom, it is a bearish candle formation. You can often see these pins before major price reversals take place. In case of bearish pin, price starts rising and usually rises through the day when suddenly sellers step in and price crashes closing at the lower end of price bar. In case of bullish pin, price starts falling and usually keeps on falling through the day when suddenly buyers step in and price keeps rising till the end of the day and closes at the higher end of price bar. Bearish pin Bullish pin Below is the example of eur/gbp pair. The pair was in range from September of 2014 through December when the range was broken downwards in the beginning of January, 2015. However, if you analyze the daily chart more closely you will see that on the 16th of December, 2014 a big bearish pin bar formed on the chart. It means big selling pressure started coming from Euro bears and price kept on falling for the next three months almost without stopping. eur/gbp daily chart (Euro collapsed after bearish pin bar formed in a range) Pin bars can also be effectively traded in a range when they form around support and resistance levels. If you see a bullish pin at support you would only be looking for opportunities to buy and when you see a bearish pin at resistance you would only be looking for opportunities to sell. As you may understand these candle formations can be found on various time frames: monthly, weekly, daily, hourly and minute chart. The higher the time frame, the more reliable those patterns are. The lower the time frame the more noise there will be and a lot of signals that will not work...

Use minute charts for entering trades

Working with charts requires skill, practice and understanding what time frames are best for analyzing a given market and what time frames are best for implementing your trades. It is no secret that longer time frames are much better for analyzing trends, spotting market direction and sometimes for entering trades if one is a long term investor. Small time frames, on the other hand are good for entering trades. Long term charts give you a bigger picture and make you aware of current market conditions. Small time frames (15, 5 and 1 minute chart) help you to find exact levels where you have to enter your trades, place stops and take profit targets. Most of day traders use 15 minute chart for entering their trades and those who scalp use 15 minute charts for analysis and 5 as well as 1 minute charts for entering the market. So, if you want to have a bigger picture work with weekly, daily and hourly charts and when you know market conditions and direction use smaller time frames to enter your trades. This will increase your sharpness for both market direction and understanding of where the market is going to reverse as well as where exactly to place your trades....

Seeing the Big Picture in the Charts

As you may know traders mostly rely on fundamental or technical analysis trying to make their decisions on how to trade a specific security. Those who are technicians by nature will basically try to understand what happened, is happening and is going to happen in the market by studying charts. But what kind of charts one has to study? It depends on your preferences and the way you process visual information. However, it is recommended to study candle stick charts on higher time frames. Why? Candle stick charts are best because you can see variety of candle formations on them that may indicate continuation of a trend, reversal, range and etc. The most common candle stick patterns are: Engulfing, Hammer, Harami, Piercing, Doji, Shooting Star and Dark Cloud Cover. Chart no 1 (Example of Chart patterns) Daily, weekly and monthly time frames are best for seeing the big picture in the market. You can spot trends, ranges, choppy markets on these higher time frames and having spotted what you expect you can go to smaller time frames: hourly or minute to enter your trades, put stop loss and take profit orders. Chart no 2 (Big picture on bigger time frames) Chart no 3 (Traders use smaller time frames to enter...