Strong Trading Strategy, Do not trust all the pin bars

BINANCE:BTCUSDT   Bitcoin / TetherUS
The pin bar pattern is one of the best signals on any market for predicting the next move. But should you trust all pin bars? In my humble opinion, NO, and I’m explaining this idea below and the approach I take to distinguish valid pin bars from invalid ones.

I suppose you already know what is a pin bar, so I’ll not explain its basic details here. If you don’t know please, do a search and read its basics first.

I have 3 filters for my pin bars. Find them below and boost the idea if you liked it :)

1- What should it look like?
In my opinion, having a candle with a shadow (wick) longer than the other and a small body is not the only factor to call it a pin bar. I filter pin bars by expecting some pre-defined proportions and ratios between body size and shadow lengths. Here are my rules:
  • The body must be at least 2% of the candle height.
  • The long shadow must be at least 4 times bigger than the body.
  • The long shadow must be at least 2 times bigger than the short shadow.

I know you are rightly thinking about how to calculate them, but do not! There is a simple indicator that does this calculation and highlights the pin bars for you, the Abnormal Pin Bar indicator. You just need to set it up with your values. You can even set up an alert to let you know when a pin bar is shaped.

These are my rules and values that fit my strategy, you can use them. Also you can do your own tests to find the values that fit your psychology and your strategy. You can say you prefer a pin bar that has a bigger body than yours! it’s okay, just do your own tests to make sure it works for you.

2- What is behind that?
Always inspect the smaller timeframe to check if the sub-candles that shaped the pin bar confirm its bearishness or bullishness. Yes, you should always see the big picture but remember, all the moves start from smaller timeframes. You shouldn't expect too much from a movement with bad groundwork.

For a bullish pin bar, its bullish sub-candles must overcome the price action and volumes of its bearish ones, and on the other hand, for a bearish pin bar, its bearish sub-candles must surpass the price action and volumes of its bullish sub-candles.

It would be nice to write a long and detailed article about bearish and bullish sub-candles competition and when they overcome each other. It's not something you decide just by comparing the number of bullish and bearish sub-candles! Long story short, it’s all Price Action and Volume Analysis. and my favorite one is when the volume of sub-candles in one direction surpasses the volume of the candles in the opposite direction. Or you can look for volume and price anomalies.

What is the volume and price anomaly?
The volume and price anomaly is a simple pattern that occurs in two consecutive candles. Assuming two descending candles or two ascending candles in a row, if the body of one candle is bigger than the other one, we expect its volume to be larger, or if the body of one of them is smaller, we expect its volume to be small. Now, if this pattern is not observed for two consecutive candles, we call it a volume and price anomaly.
For example, a candle has a larger body than the previous candle, but its volume is smaller than the previous candle. Or a candle that has a smaller body than the previous candle, but its volume is greater than the volume of the previous candle!

Anomaly Confirmation Candle:
In most cases, after the volume anomaly, I wait for a confirmation candle. This candle will be a bearish candle for a bullish anomaly and will be a bullish candle for a bearish anomaly. The volume of the confirmation candle is very important in anomaly, and in addition to its shape and size, you should also pay attention to its volume.

I just explained the anomaly here to give you a point of view and perspective. I don't want to make this idea overlong so I do not go into more details. Maybe it would be a subject for another idea ;)

In which timeframe should the inspection be done?
You will understand which timeframe you should choose to inspect a pin bar sub-candles by experiencing it over time, but I personally consider two things:
1- The timeframe must be well-known and be used by not only me but also by most traders.
2- It must contain at least 4 sub-candles. e.g. for a daily pin bar, 12h reveals only 2 sub-candles while 4h reveals 6.

For example, for a closed daily pin bar, it would be a good check to inspect candles for the 4h timeframe. or after a weekly pin bar close, you can check the candles of the last 7 days.

Consider this instruction and practice on the chart to see the result.
If one of the pin bars in sub-candles is also a pin bar, do the same inspection for it.

3- On there any key level around?
A pin bar is an important pattern but one that touches a trend line or any important level is leading! The combination of a key level and a valid pin bar is something very valuable and instructive. It's definitely not to be missed, provided you do your own analyses.
Prioritising trend lines and important levels always makes my decision easier when a pin bar spawns near to more than one significant level.
Check twice if you face a pin bar in peaks, troughs, resistance or support areas, supply and demand zones, or as a rejection from a trend line.

You can use the Trend Key Point indicator to highlight important levels. Additionally, there is a guide about its usage.

Bonus Tips:
  • Pin bars on bigger timeframes are more reliable.
  • If there are lots of pin bars shaped on a chart, think twice, select a bigger timeframe, or do not use this strategy on that specific asset.
  • For two valid pin bars in a row, the one with a bigger volume is more important to me.
  • Check twice if the volume of a pin bar is bigger than the volume average.
  • Check twice if the volume of a pin bar is bigger than the volume of its previous candle.

Do you have any questions? ask in the comments.
Do not hesitate to write your opinion about this idea.

I'd appreciate if you share this idea with your network.


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