Often referred to as Long Shadows, a typical Pinbar Candlestick is shown below:
Pinbar Candlestick is a very important tool when it comes to formulating a trading strategy. So, what does a Pinbar Candlestick represents? This form of Candlestick shows clear rejection of a price level in a certain direction. When this Candlestick appears, it shows that a price level (can be a support price level or a resistance price level) is rejected and there will be price reversal. In other words, when a Pinbar Candlestick appear, the price will start moving in a direction opposite to the price direction that was rejected. We will explain this with a proper graph in a while but before that, let us take a look at some of the characteristic features of a Pinbar Candlestick.
The features or facts:
- A Pinbar Candlestick will have an upper shadow or a lower shadow always significantly bigger than the real body.
- A Pinbar Candlestick will generally appear at the top of a trend or the bottom of a trend. A Pinbar Candlestick can appear somewhere in the middle of the trendline but that is never a valid one to trade with if you want to trade for a price reversal.
- A trade must always be placed in the direction that is opposite to the direction of the spike in shadow. This means that if a Hollow bar Candlestick shows a spike in the lower shadow, it is rejecting the Bearish trend in the market and one must trade in the opposite direction, i.e. the Bullish direction. On the contrary, if a Filled bar Candlestick is showing spike in upper shadow, it is rejecting the Bullish trend in the market and one must trade in the opposite direction, i.e. the Bearish direction.
Consider the following chart below:
In the above chart we used a 50% Fibonacci Retracement to see the support level and observe that a Hollow Candlestick gets a spike in lower shadow which occurs towards the bottom of a downtrend shown by a downward sloping green line. This Hollow Candlestick is a Pinbar Candlestick which is rejecting a lower price level (i.e. a Bearish trend is rejected) and will hence lead to a price reversal and the market will take Bullish trend. This is exactly what happens in the chart! Based on the above chart, we will make a Call option trade.
What if a Pinbar Candlestick appears in the middle of a trend?
This can happen and it actually happens in real trading scenarios. If a Pinbar Candlestick appears in the middle of a trendline, you cannot go for a price reversal trade. In this case, the Pinbar Candlestick will have something else to tell you about the movement of the price.
- If a Hollow Pinbar Candlestick or Bullish Pinbar Candlestick appears in the middle of an upward trend, it means that the upward trend will continue for some time.
- If a Filled Pinbar Candlestick or Bearish Pinbar Candlestick appears in the middle of a downward trend, it means that the downward trend will continue for some time.
Consider the following trendlines:
So, if you see a Bullish Pinbar Candlestick appearing in the middle of an uptrend, the uptrend will continue for some time and you can safely use Call option. And, if you see a Bearish Pinbar Candlestick appearing in the middle of a downtrend, the downtrend will continue for some time and you can safely use Put option.
- A Bullish Pinbar Candlestick appearing towards the bottom of a downtrend will mean rejection of Bearish trend and a price reversal with Bullish trend.
- A Bullish Pinbar Candlestick appearing in the middle of an uptrend means the uptrend will continue for some time.
- A Bearish Pinbar Candlestick appearing towards the top of an uptrend will mean rejection of the Bullish trend and a price reversal with Bearish trend.
- A Bearish Pinbar Candlestick appearing in the middle of a downtrend means the downtrend will continue for some time.