Price Action is a trading strategy that completely eliminates usage of indicators. In fact, trading on Price Action is carried out only on price patterns.
Price Action Strategy Benefits
Let’s take a look at the benefits of Price Action trading. No one will argue with the fact that the price is a primary factor. Therefore, everything else is secondary, including indicators. One of the key points of technical analysis is that price takes everything into account. Supporters of Price Action add to this: the price itself shows where it will go next and no secondary things are needed for this.
Why do those who trade with Price Action are against the usage of indicators so much? They claim that all signals generated by indicators are late, and therefore mislead us. I personally do not understand this point of view, because I successfully combine trading with indicators with Price Action techniques. In my opinion, there is no point in refusing additional instruments that can help while trading forex.
There are a lot of different price patterns, but in this article we will talk about the main one because all the rest are just variations on it.
Pin Bar Price Action Pattern
Pin bar is one of the most powerful yet easily recognizable candlestick patterns in chart analysis. It is one of the main price action patterns. Its name comes from the name of the famous character Pinocchio from the fairy tale by Carlo Collodi.
Let’s look at the chart below. The trend is upward and the price is rising. Then a candle with a small body appears. And at the same time, it has a small shadow on one side and a huge shadow on the other:
Moreover, the body of the setup must be within the range of the previous candle, that is, from the High point to the Low point of the previous candle.
A pin bar is a reversal pattern that suggests that a price will go an opposite direction. And this is exactly what we see in the picture above.
Trading Pin Bar Price Action pattern
There are several ways to open a trade on a pin bar.
- The first one is aggressive, as soon as you see that the pin bar has closed, you open a trade.
- The second one is conservative, you wait for the price to break through the bar boundary (if the tail is down, then this is the upper limit, if the tail is up, then the lower one) and only then open a trade.
- The most conservative is to wait for a rollback towards the 50% tail and open a trade.
Trading with the trend is arguably the best way to trade any market. A pin bar entry signal, in a trending market can offer a very high-probability entry and a good risk to reward scenario.
In the example below, we can see a bullish pin bar signal that formed in the context of an up-trending market. This type of pin bar shows rejection of lower prices (note the long lower tail), so it’s called a “bullish pin bar” since the implication of the rejection reflected in the pin bar is that the bulls will resume pushing price higher…
My conclusion on trading pin bars
Pin bars basically show a reversal in the market, so they are a very good tool for predicting the near-term and sometimes long-term directions of price. However, it should be noted that not every pin bar is going to be one worth trading. The best ones occur in strong trends after a retrace to support or resistance within the trend.
If you are a beginner, look for daily and 4 hour chart time frame pin bars, as they seem to be the most accurate and profitable ones. In addition to this, keep in mind that longer tails on a pin bar indicate a more significant reversal and rejection of price.
In conclusion, I would like to say that trading using the Price Action method is very popular worldwide, however, I still see no reason to abandon indicators. You can successfully combine both methods and get a double benefit.
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Thank you, Oliver, for the article. I used to trade with price action patterns only in the beginning. But I became more successful with the indicators that take into account more than just a price, so I agree with your point.