How To Filter Trading Signals Through Pin Bars And Support And Resistance Zones
Trade setups that produce artificial signals either depend on chart patterns or are based on candlestick patterns. For those that count on candlesticks, the pin bar signifies one of the most significant signals that can be utilized to filter good and appalling trade entries. Candlesticks are storytellers of what buyers and sellers are doing. A pin bar is a vital candlestick that indicates what buyers and sellers are doing within the framework of the pre-existing trend. So, if a pin bar appears on your charts, better understand what it is saying before jumping the gun.
Here are a few tips to filter out good and bad trading signals, especially ones that depend on candlesticks:
False breakout against true breakout: Beware of the pin bar
If a pin bar appears after a persistent long trend, it is a sign that prices are ready to reverse. Several traders are not patient enough to wait for the end of the pin bar candlestick. When a pin bar first shows up after a trend has been continuing, it begins with price action in the course of that trend. But what shapes the shadow of the pin bar is the action of traders who are resisting that trend. If the pin bar begins pushing through a key level of support, it can be wrongly interpreted as a breakout. See chart below:
The XAUUSD chart above shows 4 areas (numbered 1-4) where the candlesticks met resistance at a particular price level, and a pin bar has molded, which begun by pushing beyond this level as if it were breaking above the resistance, only to be tightly resisted by sellers and close beneath the resistance, causing a price turnaround. These kinds of false breakouts happen always. Be alert to them.
The golden rule is not to trade an active candlestick as a breakout; let it close to see if it forms a pin bar, or wait for the second candlestick to close outside the support line before we can talk of a clear breakout.
Long-tailed pin bars are better than short-tailed
The tail length on a pin bar says a lot about the strength of the rejection of the opening price movement in that candlestick. A longer tail signifies that the initial move was strong, but the rejection of this move was stronger. If the pin bar materializes at the top, sellers were strong enough to move back the price, which means that selling pressure is still there and could push the value even lower. Conversely, if the pin bar materializes at the bottom, it means that buyers were strong enough to shore the price back up and there is need to understand that it could keep going up with the underlying drive.
Enter with confirmations only
Trying to trade once a candlestick breaks a support is not good practice because anything can happen while a candle is still active. As regards pin bar formations, traders working against the trend might easily push back on any endeavored breakout movements and compel the candle to close under a resistance or beyond a support.
Heedless of how long a candlestick appears to have pushed in the direction of the breakout, one can only know if a true breakout has taken place when that candlestick has closed. Several made-up breakouts end up being “fakeouts”, and traders get sucked into them repeatedly.
From the chart of the NEOUSD pair above, price action appeared to be on its way to an extremely strong breakout, only for a mysterious rejection to arise almost instantly, pushing prices back to where they came from. Buyers awaited a price drop and jumped in instantly when they felt the low price didn’t show the fundamental value of the instrument. Sellers decided that the instrument was undervalued and didn’t force the price lower.
You should know by now how to filter good and bad price action signals based on pin bars and support and resistance zones. However, be aware that other candlestick patterns may also be used to filter entry points, but pin bars are simple to spot and provide high-probability trade configurations. Keep in mind that the length of the upper/lower shadow of the pin bar has countless significance; the longer the shadow, the more momentous the pin bars are.