Finding your first profitable forex strategy is an important milestone towards becoming a full-time forex trader.
The psychological boost a trader gets from having his or her first profitable forex strategy is huge. It gives you the confidence to believe that earning a living from forex trading is possible and that helps persevere through any difficulties.
Before we proceed, there is an important distinction to make between a profitable forex trading strategy and something that you use to earn a living from forex trading.
What new traders really need to get started trading is a reliable ‘edge’ that has shown to produce good trading results over time. In this blog we present the pin bar pattern in concert with Fibonacci retracements and trend analysis as building blocks to a profitable forex strategy.
What is a trading edge?
A trading edge is something common to all profitable trading strategies (day trading, swing trading...). It is a price action signal or some other occurrence in the forex market that results in a tradable opportunity that can be repeated over time. The word 'edge' comes from the idea that the occurrence gives a trader an ‘edge’ over other market participants. The pin-bar candlestick pattern, when traded at areas of support & resistance and in the direction of the trend provides such an edge.
The pin-bar forex pattern
The trading strategy we are about to present is a simple yet proven profitable forex strategy.
It rests around a Japanese candlestick pattern that is commonly known as a pin bar – which is short for Pinocchio bar.
It is a one candle pattern and looks like the following:
The Japanese have a slightly different name, which translates to "shooting star" for the bearish pattern or ‘hammer’ for the bullish pattern.
The logic behind the BEARISH PIN BAR is that the price has move up a lot through the time period represented by the candle but then closed the day back down close to where it started. In essence it demonstrates bears quickly taking over from the bulls in just one period.
The thinking around the BULLISH PIN BAR is very similar but in reverse. The price drops substantially over the period of the candlestick but then closes right back where it started. So what was a very bearish period, reversed – turning it into a bullish signal for the new few candlesticks.
Normally it takes longer for the strength to switch from bulls to bears or vice versa – and we can see that in top and bottom patterns like the Double Top and Double Bottom patterns. Hence the unique strength of this forex signal – who has control of the market changes very quickly.
Using a pin-bar pattern in a profitable forex strategy
As you can image, something like the above image of a pin bar occurs quite frequently in forex markets and most of the time the pattern does not offer a tradeable opportunity that gives the trader an edge over time.
A trading strategy consists of more than just one candlestick pattern- that is just the starting point.
The key is to use the pin-bar pattern in combination with some other technical analysis as well as risk management techniques to narrow down the number of trading opportunities to only the best ones and make sure the risk is worth the reward.
Profitable trading strategy setup
- Set the price chart to daily candlesticks
- Add a 200-day moving average
- Find a forex pair which has been above the 200-day moving average for at least 20 days
- Wait for the price to retrace
- Draw a Fibonacci tool from the start of the last price rally to recent high
- Wait for a pin-bar pattern at either the 38.2%, 50% of 62.8% Fibonacci levels
- Enter a market order to buy at the open of the next day (new candlestick)
- Set a stop loss under the low of the pin bar pattern
- Set a Take Profit limit order 2x the distance of the stop loss.
- Wait for either take profit or stop loss to be triggered
The chart setup should look something like this:
The combination of a trend trading strategy, a known area of support like a Fibonacci retracement level and a short-term price action reversal pattern like the pin-bar make for a reliable edge in the market. Using a 2:1 risk to reward ratio based on the height of the pin-bar candle makes sure to exit the trade quickly after a pattern failure and let profits run.
Known issues with the trading strategy
There are different issues to practice and overcome. The main one of which is to only take the highest probability setups. Afterall this is a discretionary trading system and takes time for traders to get familiar with. For example, if the trend is uncertain or the pin bar pattern is not clear or if there is some strong resistance before the 2:1 profit objective, then it is best to avoid the setup.
The length of the wick and the size of the body of the candle can cause some confusion. A rule of thumb is that the body of the candle should be small but can be either color, while the wick should be at least 3x longer than the bossy.
The example above uses a daily chart but the pin-bar pattern can be traded on any timeframe (for example in a 4-hour forex trading strategy) but the higher the timeframe, the more reliable it becomes.
Good luck practising !