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Pin bars: introductory tutorial
Lincoln (a.k.a. lwoo034 at Forexfactory.com forums)
Introduction
Jim (a.k.a James16 at the Forexfactory.com forums) has taught many
forexfactory.com members how to play pin bars. This instruction has been through
demonstration over dozens of posts. This makes it difficult for a learner to quickly
pick up key concepts and terminology. This tutorial on how to play the pin bars has
been designed as a good first lesson and introduction to pin bars. It provides an
explanation of the pin bars and familiarises the reader with terms used by James16 in
the examples (such as ÒeyesÓ for the pin bar). The Advanced Tutorial covers some
higher-risk setups that may appeal to some traders. For further instruction please see
the James16 Chart Thread at Forexfactory.com or the James16 private forum
(www.james16group.com).
Topics covered in this tutorial:
Introduction to pin bars Î what the pin bar looks like
Playing the pin bar Î how to enter a trade based on the pin bar
Trading the pin and managing risk Î trading the pin bar sensibly
Finding the pin bars Î
a look at pin bars (and bars that are NOT pin bars) over a one
month period
Some final thoughts Î some closing remarks
Terms used in this tutorial:
Eyes Î the extreme values that the price reaches on the bar before and after the pin
bar. See Figure 1 for a visual explanation.
Fib level Î Fibonacci retracement level of the previous move. Most charting
applications have the ability to draw these automatically or easily.
MA Î moving average.
Nose Î The long spike of price in the pin bar. See Figure 1 for a visual explanation.
Pin bar Î abbreviation of Pinocchio bar, coined by Martin Pring (pring.com). They
are also known as ÒpinsÓ.
Inside bar Î a bar which has a lower high and a higher low than the previous bar (it
sits inside the range of the previous bar).
Legal notes: The author accepts no liability (or responsibility) for loss or damage
suffered through application of techniques or methods discussed in this file.
Permission is granted to distribute this file while the contents remain unchanged
and no charge is made.
Introduction to pin bars
This section explains what the pin bar is. Following sections explain how it may be
traded. Generally examples are only given for pin bars pointing one way. The same
concepts can be applied to pin bars pointing the other way (just reverse the concepts!).
Trading is a probabilities game. There is always risk of loss and the trade going Òthe
wrong wayÓ after the pin bar has formed. All we can expect to do is to tip the odds in
our favour. When good pin bars are traded then a trader can tip the odds in their
favour. Some trades will result in losses; such losses will occur with any trader from
time to time. (Even a good pin bar setup may result in a loss!)
Figure 1. The anatomy of a pin bar
Looking at Figure 1 we can see what a completed pin bar looks like. See that this
Pinocchio bar (which is abbreviated to Òpin barÓ) is poking his long nose outwards and
is telling you a lie (an untruth) about where the price is going. The name is based on
the old European story about the wooden boy, Pinocchio, whose nose grew longer
every time he told a lie. The bigger the lie the bigger the nose! For us this means that
we want a nice long nose when we see a pin bar. We trade in the opposite direction to
where the nose is pointing (so the pin bar in Figure 1 indicates that traders should be
taking short positions while trading EURUSD). The high of the bars on either side of
the pin are the ÒeyesÓ for the pin bar. Note that the open and close of the pin must be
within the left eye. For a nose pointing up, this means that if the high of the eye is
roughly at the 1.2175 level (as shown in Figure 1), then the open and close of the pin
bar must be below this level of 1.2175 (as is the case here). If the open/close is
outside of this level then it is not a real pin bar (see the Advanced Tutorial for some
ideas on how a trader might deal with a bar that looks like a pin bar but fails to meet
this requirement).
The pin bar means that the price is going to move in the opposite direction to where
the nose is pointing. In Figure 1 the nose is pointing up so the trader should expect
prices to move down.
A pin bar must:
•
have open/close within the first eye,
•
protrude from surrounding prices (Òstick outÓ from surrounding prices); it
cannot be an inside bar.
A good pin bar has:
•
a long nose (and a long nose relative to the open/close/low),
•
a nose protruding a long way from the prices around it (it Òsticks outÓ),
•
the open / close both near one end of the bar.
The pin-bars can be played by themselves as they occur on the charts. One
forexfactory.com member did some automated back testing and found that merely
playing a pin bar does not provide spectacular results. You need to carefully select the
pin bars you want to play. The best pin bars are played as they bounce off either:
1) Fibonacci levels (retracements of the previous move)
2) Important pivot levels
3) Moving averages
4) Confluence (several MA or Fib levels in the same general region)
5) Swing high / swing low
6) Retracement of the current move (must retrace a minimum of 23% fib
retracement of the current move), which is a lower probability play.
For the BEST results a trader may play a pin-bar on the swing high (or swing low) or
a pin-bar that is bouncing off confluence (of MA and Fib levels). The pin bar is a very
reliable setup under these circumstances, indicating that there is a high probability
that prices will change direction Î which is very tradeable setup!
Shown is a cluster of Fibonacci retracement levels from the big moves down during
2005. Note that the pin bar is bouncing right off these. This means that the pin bar has
bounced off an area of confluence!
Figure 2. A look at the pin bar and fib retracements of previous moves
Shown in Figure 2 is a close-up of the pin bar that formed on the EURUSD pair
weekly chart. Notice that there is confluence of fib retracement levels from the more
recent previous movements down. This pin bar has punched through these, after three
previous bars were bouncing off this area. This would have been a good pin bar to
catch. The three previous bars failed to move through this area, showing it has
significant resistance. The pin bar has moved a long way through it before moving
right back down again. The high made by the pin bar is probably the highest price that
will reached for weeks (or months).
Is this a good pin bar formation? The nose of the pin bar pokes out a long way above
previous prices. It has made it through some resistance at the confluence of fib levels
and bounced off the longer-term fib levels (in Figure 2). The open and close are below
the high of the previous bar (the eye). Yes Î this is a good pin bar.
Playing the pin bar
This section details how the pin bar can be played. The advanced tutorial provides
more details of how a more experienced trader might approach the pin bar.
Traders that are new to pin bars may put a limit/stop order under the bottom of the pin
bar. It is placed 10 pips under to account for a false break-out (unlikely to be 10 pips).
When this order has been triggered then the trend will probably be heading in the
opposite direction of the nose. This approach also means that the trade does not need
to be monitored so closely.
One question that traders may
want to ask themselves as they
contemplate entering a trade is
this: ÐWhen will I know if the
trade has gone against me and
this setup is not working?Ñ
When you know how to tell
whether or not your trade setup
has failed and is not going to
work you can begin to
calculate how much risk you
can take. These calculations
are performed before placing
orders so that the appropriate
level of risk (on the basis of
account size) may be
determined so that an
appropriate position size may be taken.
The conservative approach to placing stops is to place stops 10 pips from the end of
the pin-bar/nose (the point where the prices are not going, far from the eyes). This
level is acting as resistance now. The stop loss and entry orders are placed 10 pips
away from highs and lows because sometimes prices will creep a little big past these
highs or lows which can have a negative impact on the trade setup.
Traders need to discover their own preference for stops and risks based on the pin bar.
The Advanced Tutorial gives some more ideas of how to enter and set the stop losses.
Trading the pin and managing risk
This section discusses what to do once the trade has been entered and how to manage
the risk during the trade.
So, youÓre in the trade - congratulations! Unfortunately entering the trade is simpler
than exiting it correctly. Very often several traders in a forum will enter a trade based
on pin bars yet one trader will make twice as much profit as another trader because of
the differences in the way they exited the trade. The recommendations in this section
are based on the following four premises:
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