How to Trade Binary Options Using Pin Bars
There are numerous strategies that seem to work better than others. Beginner traders will often try many trading strategies before adopting one that works best for them. This is true for Forex, as well as Binary Options.
Especially with the latter where the temptation to win large profits very quickly is strong, traders chase a dream trading strategy that will work for the short expiry times such as the 1, 2 or 5 minutes.
This type of thinking gets many beginner traders into trouble. Trading very short expiry times requires looking at M1 or M5 charts where the price action is very unpredictable. It is basically market noise and the odds of predicting wins consistently of at least 70% are near impossible. To understand why it’s important to control your losses in binary options read Is it possible to make money in binary options. Beginner traders should look into trading the H1, H4 and Daily charts.
Anatomy of a Pin bar
The Pin bar is one of the most powerful price patterns that is used by many professional traders in their technical price action analysis. In order to understand why it is important we need to examine its structure. The pin bar has a very small body in relation to it’s wick.
What that means is that the price levels fluctuated and were rejected at their extreme levels only to go back near the start price level. The Bullish Pin bar has the real body at the top and the Bearish Pin bar has the real body at the bottom, as seen in the picture above. These examples show ideal Pin bars, but they can often look slightly different. The most important thing is the small real body and a long wick.
The Pin bar trading strategy for binary options
Pin bars are excellent signals that mark a rejection or an indecision (fight between bulls and bears) at specific price levels. This is important to understand because Pin bars can actually appear anywhere in the price action. See picture below:
Looking at the charts we can see that Pin bars can appear when the the price is consolidating and we’re experiencing a sideways market , but that does not mean they should be traded. You can see in the example above that pin bars are very common yet they don’t always signify a pullback or a trend reversal. As you can probably tell, trading these Pin bars marked in the chart above wouldn’t be very successful.
Although pin bars can appear anywhere in the price action they should only be traded in a trending market and when they appear on drawn support and resistance lines or channel trend lines.
One should trade Pin bars only at specific price levels marked as support and resistance lines or within a trend channel on trend lines.
Most successful strategies, those that are often used by winning traders involve a thorough analysis of the price action at its resistance levels.
As you can see in this chart, the Pin bars that appear on a support/resistance lines give us a much stronger signal where the probability of a successful trade is much higher than if you were to trade Pin bars anywhere on the chart. (Read more about trend lines, channels and support and resistance lines.)
In addition, trading the price action between drawn support and resistance levels and trend lines also give you a good idea how far the price action will go and where it is likely to stop or at least slow down and possibly even reverse.
One thing to mention about S/R and trend lines is that they are completely useless if you draw them on M1 or M5 charts. They do not work on such short time frames.
All trend lines should be drawn on a Daily chart first.
Then, additionally you could add more S/R lines by analyzing the H4 and H1 charts. Most professional traders look at daily S/R lines and the market is very responsive at those price levels. This can be used to your advantage in binary options trading.
When to enter a trade based on a Pin bar
Now that we’ve established what a Pin bar is and that it should only be traded on a support and resistance lines or trend lines, we will now take a look at how to enter a trade based on a Pin bar pattern.
When a pin bar appears on our support/resistance line we should assume that it might be a good trading opportunity but we should not enter the trade just yet. The best time to enter such a trade set up is when the price action confirms the Pin bar and passes its body and wick. Please see the chart below.
You have to understand that Pin bar trading strategy will not produce 100% of wins, no strategy is capable of delivering such high win ration. However, it is one of the most trusted trading strategies among professional traders. The key to success, however, is to draw SR lines correctly and not to enter to early. Every Pin bar needs to be confirmed with the price action that will follow.
If you’re using MT4 trading platform there is a very useful Pin bar indicator that will definitely help you recognize good trading opportunities based on what was discussed here. The indicator, in addition to analyzing the price action and performing calculation on trade entry, will also produce trade alerts and send signals to your mobile or email for free. (To receive mobile and email signals your MT4 platform needs to be running and configured.) View MT4 Pin bar indicator in action.
How to set an expiry time for Pin bar strategy
When you trade binary options you need to define an expiry time. With the Pin bar signal and price action confirmation one could put the expiry on the next candle or 2-3 more candles. There often is a price pullback that may reach similar levels of the trade entry, which could be risky.
When trading 1 hour chart the expiry time could be set to 1-3 hours. Trading the Daily charts the expiry could be set to 1-3 days. This is only a general guideline and it is not back tested.
There are some options that let you close your trade early and collect half of the profit. This can be a good way to capitalize on your winnings if you feel that the price action will suddenly reverse.Published in Free Strategies