Estimated reading time: 5 minutes
Although I have lately focused on binary option trading systems which aren’t 100%, purebred chart pattern-based ones, and which are therefore more suitable for beginners, I feel it’s about time to return to the chart-pattern realm by taking a look at one of the purest such systems: the pinbar strategy. This trading system – suitable for the trading of the Put/Call and Touch/No Touch contracts – is based on candlestick patterns called “pinbars”. These pinbars are made up of single candlesticks, so actually calling them a chart-pattern is a bit of a stretch, but they’re relatively easy to spot and when strategically positioned, they signal a trend-reversal, which is what we’re aiming to exploit trough this strategy.
Now then, the problems plaguing chart-pattern based systems, namely the fact that the patterns on which these strategies hinge are difficult to spot and that the trading signals they generate usually aren’t strong enough on their own, are very much present in the case of the pinbar strategy too. We do have a couple of tools though which we can use to mitigate these problems and we’ll take a look at those soon enough too. Let’s not cut ahead of the chase though: when we say pinbar patterns, what exactly do we have in mind?
There are two basic pinbar categories: pinbars which suggest the reversal of a bearish trend into a bullish one called “bullish pinbars” and candlestick patters which herald the reversal of a bullish trend into a bearish one, called “bearish pinbars”.
In the first of these categories, we have candlesticks such as the dragonfly doji, the hammer and the hanging man. In the bearish pinbar category we have the doji, the inverted hammer and the shooting star candlestick. Any one of these patterns can mean an impending trend reversal, but – as said above – the signals they generate are rather weak, so whenever we spot one of these, we’ll bring in a tool to try to confirm the signal. Those who know their trading, probably already know that the tool we need here is the automatic pivot point calculator, the master of so many such situations indeed. Without the use of the pivot point calculator (which is available for the MT4 platform for free by the way), I do not recommend that you place your trade based on the signal generated by the pinbar alone.
How does the automatic pivot point calculator work in this situation though? It draws up its color-coded support and resistance levels and its daily pivot, thusly giving an instant X-ray sort of view of the chart for the trader. If the pinbar one has identified coincides with one of the said support or resistance levels, we have a confirmation of the trading signal. More precisely, pinbar patterns indicating a bullish reversal have to be situated at one of the support levels, while the candlesticks indicating a possible bearish reversal have to be on a resistance level.
I consider the use of the automatic pivot point calculator a must for this strategy, but that doesn’t mean you cannot employ additional, optional tools to gain further confirmation. One such additional tool is the stochastic oscillator which is meant to help traders identify oversold and overbought situations for the asset price. That makes it obvious that the stochastic oscillator fits our needs here like a glove. Here’s how we’re going to use it: if the bullish pinbar we have identified is situated at one of the support levels (S1, S2or S3) drawn up by the automatic pivot point calculator, and the lines of the stochastic oscillator cross at <25 where it is, indicating an oversold situation, we have essentially everything screaming at us to make that trade.
If we’re talking about a bullish pinbar, and it is located on one of the resistance levels (R1, R2 or R3), and the lines of the stochastic oscillator cross at >75, indicting an overbought situation, once again we have a strong confirmation of the signal.
Now that you know what tqhe pinbars are and how you can “read” them with the help of the above described two tools, and you know a trend reversal is imminent, placing a trade that will handily exploit this reversal is a walk in the park really.
Here’s how the actual strategy works (let’s consider the Put/Call contract first). Let’s take a look at a bullish reversal first. Once the pinbar is spotted and double- and triple-checked, a Call option should obviously be purchased, right at the tip of the very next candlestick if possible. If the analysis has been done on an hourly chart, the expiry should be set to 4 hours. If the analyzed chart isn’t an hourly one, use the recommendation above to figure out your expiry time.
The Touch/No Touch zones shall be very clearly separated on the chart by the support level on which our pinbar occurred. Below it is the No Touch zone, while above it, we’ll have the Touch zone. The pivot points which are above our critical support level (where the reversal occurred) can be used as strike-prices for the Touch trade. The expiry on this trade should be much more generous: it should be set to 24-48 hours, to allow the asset price enough time to move into profit.
The whole shebang works in a similar way with a bearish reversal. In this case, the critical pivot point will be a resistance level, and the trade we’re going to purchase is a Put one, with a 3 day expiry.
The No Touch zone will be above the critical resistance level this time, while the Touch zone will be below it. The pivot points below the critical resistance level will be the strike prices for the Touch trade. The expiry has to be set to about 3 days in this case.
Regardless of how well you think you have this strategy mastered, make sure you test-run it on a demo account before you start using it for real money trading.
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