Pin Bar Trading from Consolidations

As a general rule, we want to trade pin bar setups from key swing points. If we are trading them counter-trend, we’d like to sell at a SH (swing high), or buy at a SL (swing low). If we are trading them with trend, then we want to trade them on pullbacks into key support and resistance levels.

But there is another common price action environment whereby trading pin bars can result in high probability setups. That is from consolidations.

First, we have to define what consolidations are. These price action environments are also known as ‘corrective moves’, that occur after key impulsive moves. Basically consolidations are part of typical with trend movements.

Using an uptrend for an example, after a strong bullish move, the price action will tend to ‘consolidate’ near the highs. This is represented by the bars getting smaller, indicating very little directional order flow.

If the trend is up, this is a good sign, because it means the bears are not counter-attacking much at all. If they were, the bear bars would be larger, and the price would move lower.

Instead, the price ‘consolidates’, generally moving sideways. There should be a relatively clear top and bottom to this consolidation as well. Once we have this in place, then we can look for a pin bar setup.

Entry Using the Pin Bar
Once we have the consolidation in place, the key to trading them is trading with the trend. Looking at the chart below, we can clearly see we are in an uptrend. You will see several legs up (marked with red arrows), followed by consolidations (blue boxes) in the chart below.

pin bar trading from consolidations image 1

The idea is to look for a pin bar in the direction of the trend, rejecting off the consolidation’s low. To add more confluence to the signal, we’d like the pin bar’s low to touch a prior role reversal level, or the dynamic support and 20 EMA.

Once a pin bar has formed inside a consolidation level, we want to qualify it by making sure it is at least 50% of the consolidation’s range. So if that range is 50 pips from top to bottom, the pin bar would ideally be 25 pips or greater (the larger the better). Meeting all these requirements, we’d look to buy using the following two options

a) buy on close of the pin bar
b) buy on a break of the consolidation’s high

Target would be minimally 2R, or 2x our SL (stop loss).

Let’s take a look at how this setup would have worked in the chart below, particularly the second consolidation.

pin bar trading from consolidations image 2

In this chart above, we can see in the blue box we have a nice consolidation towards the intra-day highs after an up-move. There was a nice role reversal level marked by the green arrows showing how resistance turned to support.

The pin bar happens at the consolidation lows, forming a false break, then jumping higher, closing bullish and over 50% of the range. We enter using the first entry (buy on close of the pin bar) trying to capture this momentum bullish buying off the lows. Our SL (stop loss) is below the low of the pin bar.

This would make our entry at 168.75, our stop loss at 168.25 (50 pips) putting our target at 169.75 (+100 pips) for a minimum of 2R.

Less than 5 hours later, our target was hit for +2R.

If we had chosen the second entry, the stop loss would still be the same, so this means a larger stop. However, between the two, this would be the more conservative entry as it has a greater confirmation to it by the price action breaking out of the range, suggesting new bulls will come in and buy the breakout.

In Closing
The reason why we can trade pin bars from consolidation or ‘corrective’ areas, is because often times, when we have an established trend, a pin bar will form towards the bottom/top of the consolidation. This is usually a rejection by the with trend players saying we’ve had enough…time to continue the trend, and then they re-establish control of the order flow.

This taking over control of the order flow is usually marked by a signal, often times a pin bar signal with trend. This presents a trading opportunity for us to get in with the trend and capture the next leg up.

Hence, to summarize the rules;
1) Need to have a clearly established trend
2) A consolidation forms near the top for an uptrend, or bottom for a downtrend
3) A pin bar forms with the wick touching bottom/top of consolidation
4) The pin bar pushes through at least 50% of the consolidation’s range (from top to bottom)

Once we have this in place, we choose one of our two entry methods, and set a target for +2R.

Hence, this can be another powerful tool in your repertoire for trading pin bars, and finding unique with trend signals.