Pinocchio strategy (Pin-Bar)

LEVEL: ELEMENTARY

 

Is it a fairy-­tale? Is it a dream? Or is it yet another interesting strategy simply evoking the most famous of Geppetto’s creations?

As we all remember, Pinocchio’s lying caused his nose to grow, which is extremely relevant in this strategy since the Pinocchio­-like candle “lies” about the direction of supply and demand. All we need to do is learn how to distinguish the lie from the truth. A Pin­-bar is simply a candle whose nose (upper shadow) is distinctly larger than the candle’s real body (at least three times larger).

It’s a situation in which the asset’s price upon opening the candle goes into one direction and then goes back and closes the candle near the opening price. The closing price should be equal or close to the opening price. The longer the shadow, the more probable that the price chart is going in the opposite direction and that the first direction was a mere lie. A short shadow may also occur, but it’s better when it doesn’t.

There are two types of Pin-­bars: the bullish and the bearish ones. A bullish Pin-­bar has a long nose below a short real body. A bearish Pin­-bar has a long nose above a short real body.

In the picture above there are different types of bullish and bearish Pin­-bars. The candles are formations called “the hammer”, “a shooting star” or “a gravestone”. The first bearish Pin-­bar (Picture A) is the desirable one: the closing price is lower than the opening price and there is no short shadow. However, as it’s shown in Picture B, bearish Pin-­bars with short shadows or those with higher closing prices (Picture B and C) should not be ignored. Similarly with bullish Pin­-bars: Picture D shows the most desirable one when the closing price is higher than the opening price and there’s no short shadow, but it doesn’t mean that the others should be ignored. The shorter the real body and the longer the “nose”, the stronger the Pin-­bar may be.

The height of the surrounding candles is another way of distinguishing a Pin­-bar. Some also add that a Pin-­bar is valid when its beginning and end is within the scope of the preceding candle as well as the candle following the Pin­-bar.

For those who want to be informed about a Pin­-bar formation in a chart, it’s possible to set the alarm using the right indicator via MT4 platform. We recommend this one.

Pin-­bar strategy is about buying the Call option if the shadow is downward or the Put option if it’s upward. It can be done either immediately after the candle is closed or after another signal’s confirmation.

pinbar

The signal is commonly used amongst traders, which is why it’s highly effective. Still, it should not be used without thinking and it’s best to take into account other factors influencing the price chart, e.g. the trend line, since not every candle with a long lower or upper shadow and a short real body is a Pin-­bar. Therefore, it’s best to choose only those Pin-­bars that forecast the end of the trend’s correction. The signal is more effective when trading according to the trend and the lines of support and resistance since Pin-­bar often crosses the SR lines causing a false buy/sell signal. And then, suddenly, the turnabout happens and the price goes close to the opening of the candle. Taking advantage of such a situation is what this strategy is all about (naturally, while waiting for the candle to close).

For the beginners the strategy is only easy on the surface since it requires patience, the market know-­how, being able to react quickly and the ability to set the trend. Not every Pinocchio-­like candle is a good buy/sell signal. However, when correctly adopted, this strategy’s success rate is 70-­80%. For instance, with 2 exponential moving averages (8 and 21) in a chart and a signal matching the Pin­-bar.

 

Other usage:

Call option

  • 5­-minute chart
  • expiry time: 15 min.
  • bullish Pin­-bar
  • price higher than simple moving average (200 SMA)
  • any currency pair

Put option

  • 5­-minute chart
  • expiry time: 15 min.
  • bearish Pin­-bar
  • price lower than simple moving average (200 SMA)
  • any currency pair

 

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