This post is written by Daniel Lummis of FX City. FX City are providers of free and honest forex trading information, from product reviews to trading systems. FX City also provides free, no obligation, one to one training for new traders looking to make a start in the markets.
I will start by explaining what a pin bar, or “hanging man” as it is also known, is.
It’s a type of candlestick patters in which price opens, moves considerably up, or down, in one direction but then moves back and closes near where it opened. Sounds a bit confusing? It’s not. See the example below.A hanging man candlestick can be identified by its short body and long wick. The wick should be at least twice the length of the body to be considered a hanging man candlestick. The body of the candle should be as close to one end of the wick as possible and not placed evenly in-between both sides of the wick.Let us first think of the psychology going on behind this candlestick and it will be clear why this is, in my opinion, one of the most effective entry signals.The body of the candle represents the open and closing prices of the period and the wick of the candle represents the trading range for that period.In the example above, price opens and during the trading period, bulls take control and prices move considerably up. However, this momentum does not hold. The bears take back control and price falls back to close lower than the open.It’s a particularly strong signal when the pin bar appears after a rally like the example below.It shows a shift in, short term, market sentiment. The fact that prices try to continue rallying higher but fail, gives us an indication that bears have won the battle and will likely push prices down further.The candlestick in the image above would be considered a bearish candlestick. Identified by the body of the candle being at the bottom of the wick with the long wick pointing upwards.We can use the theory when the market is moving down and we see a bullish pin bar like in the example below.This example can be identified as a bullish pin bar or “hanging man”. A bullish pin bar has the body of the candle near the top of the wick with a long wick (at least twice in length) hanging down.Price tries to fall lower but the bulls take control and drive it back up to finish the trading day near the open.A good way to use pin bar reversals would be to incorporate them in to a trading system accompanied by other indicators such as moving averages or MACD. For example, when price is nearing or at a significant support/resistance point and a pin bar is formed, this becomes a high probability set up for a trade.Trend followers will wait for the moving averages to show the market is trending and use the pin bar as an indication of when to enter a trade on a temporary pull back.I am not suggesting you base you whole trading strategy around pin bars (although some traders do that). But it is a great tool to use in your arsenal. A great way to get your “edge” that traders are always talking about.
A hanging man candlestick can be identified by its short body and long wick. The wick should be at least twice the length of the body to be considered a hanging man candlestick. The body of the candle should be as close to one end of the wick as possible and not placed evenly in-between both sides of the wick.Let us first think of the psychology going on behind this candlestick and it will be clear why this is, in my opinion, one of the most effective entry signals.The body of the candle represents the open and closing prices of the period and the wick of the candle represents the trading range for that period.In the example above, price opens and during the trading period, bulls take control and prices move considerably up. However, this momentum does not hold. The bears take back control and price falls back to close lower than the open.It’s a particularly strong signal when the pin bar appears after a rally like the example below.
It shows a shift in, short term, market sentiment. The fact that prices try to continue rallying higher but fail, gives us an indication that bears have won the battle and will likely push prices down further.The candlestick in the image above would be considered a bearish candlestick. Identified by the body of the candle being at the bottom of the wick with the long wick pointing upwards.We can use the theory when the market is moving down and we see a bullish pin bar like in the example below.This example can be identified as a bullish pin bar or “hanging man”. A bullish pin bar has the body of the candle near the top of the wick with a long wick (at least twice in length) hanging down.
Price tries to fall lower but the bulls take control and drive it back up to finish the trading day near the open.A good way to use pin bar reversals would be to incorporate them in to a trading system accompanied by other indicators such as moving averages or MACD. For example, when price is nearing or at a significant support/resistance point and a pin bar is formed, this becomes a high probability set up for a trade.Trend followers will wait for the moving averages to show the market is trending and use the pin bar as an indication of when to enter a trade on a temporary pull back.I am not suggesting you base you whole trading strategy around pin bars (although some traders do that). But it is a great tool to use in your arsenal. A great way to get your “edge” that traders are always talking about.