Pinbar Continuation Scalping Forex Trading Strategy

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Pinbar Continuation Scalping Forex Trading Strategy

Yup, you’ve heard it right, pinbar continuation. This may sound absurd to most price action and candlestick pattern traders, but this is worth exploring.

While most candlestick pattern traders know that the pinbar is not a continuation pattern but a reversal pattern, there some instances when a pinbar occurs on a chart where reversal is not possible. This is because sometimes pinbars point towards the direction of the trend. So, many traders just disregard this as this does seem as a useless information. There is no reversal action that we can trade, so they just don’t trade it anyway.

But any information that could increase the odds of winning is helpful information. Even a seemingly useless pinbar telling us to go the direction we know the market wants to go could be used. That is if you understand the logic behind the pinbar pattern.

All candlestick patterns tell a story. The pinbar tells a story of how the market changed sentiments in a very small fraction of time. In fact, price changed directions in a single unit of time represented by the candle. This is why most traders see it as a reversal candlestick pattern, in which if a pinbar pattern presents itself going against the trend, then we have a probable reversal.

However, the pinbar tells more than just that. It also tells a story of how the market rejects a certain price level. For a pinbar to occur, the market should change its mind in a single candle. This often happens when price reaches a certain level and the market instantly sees that price level as an imbalance. Traders would then take trades going against that price level, causing price to instantly rise or fall in a single candle. This then forms the usual pinbar pattern, where the long wick signifies price rejection.

Another very important story the pinbar tells is that of momentum. Most traders see long full-bodied candles as momentum candles. But in my opinion, pinbars are also momentum candles. In order for the market to change directions in a single candle and form a pinbar, price has to move rapidly in one direction. This is basically the same as momentum, price leaving a certain level in a very short period of time. So, on the micro level, pinbars are momentum candles. If you would split them further, you would most likely see a long-bodied candle.

So, let us see how we can use these information that pinbars are telling us to make profit out of the market.

The Setup

When trading a continuation strategy, we need to know the direction of the trend, even with the pinbar pattern. To identify the direction of the trend, we will be using the 20-period Exponential Moving Average (EMA). This is a relatively fast moving average. If we consider the pinbar pattern as a momentum candle on the micro level, then we would be needing a strong trend, which necessitates that we use a fast moving average. We will only be taking pinbars that agree with the direction of the trend based on where price is in relation to the 20 EMA. If price is above the 20 EMA, then we only take buy trades. If it is below the 20 EMA, then we only look to sell.

Timeframe: 5-minute chart

Buy Entry:

  • Price should be above the 20 EMA
  • Price should never touch the 20 EMA
  • Wait for a bullish pinbar candlestick pattern
  • Enter at the close of the candle

Stop Loss: Set the stop loss at the low of the candle

Take Profit: Set the take profit at 3x the risk on the stop loss

Sell Entry:

  • Price should be below the 20 EMA
  • Price should never touch the 20 EMA
  • Wait for a bearish pinbar candlestick pattern
  • Enter at the close of the candle

Stop Loss: Set the stop loss at the high of the candle

Take Profit: Set the take profit at 3x the risk on the stop loss

Conclusion

This strategy is a very simple strategy, yet this has so much going for it. For one, pinbar patterns are very strong indications of price rejection. This allows us to place the stop loss at the end of the wick, knowing that in theory, the market has already rejected that price level. This then gives us a relatively tighter stop loss for a better reward-risk ratio.

Another thing going for it is the idea that pinbars are momentum candles when scrutinized on the micro level. For example, a pinbar on a 5-minute chart would probably have long candles full-bodied candles on the 1-minute chart. This often results to a strong momentum move on the next candle, which are the case on our two examples.

The combination of tight stop losses and strong momentum on the following candle results into a higher probability trade. Not only does it have a higher probability, but it also gives us the benefit of a better reward-risk ratio. With this strategy, we could have a reward-risk ratio of 3:1, when most successful traders with high win rates would be happy to have a reward-risk ratio of 2:1.

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