If not, you may want to visit this post and then come right back. Like most formations, these can form as either a bullish or bearish signal. As a general rule, the tail should make up at least two-thirds of the entire pin bar. Notice how the tail on the two pin bars in the illustration above are much more pronounced than the rest of the structure.
Next is the body. The body represents the open and close of a pin bar and can vary in size. The first rule about the tail should help keep you in line. The nose of the pin bar , which is sometimes nonexistent, is important only as it relates to the tail and body. This pattern triggered a sharp move higher back to previous swing lows, which acted as resistance.
On the second retest of resistance, sellers came out in force and eventually formed a bearish pin bar. I wrote a more detailed lesson on the pin bar where I get into what makes a tradable setup as well as where to place your stop loss and target. This observation is especially true for those trading anything less than the daily charts. Take a peek at the video below where I explain the characteristics of the inside bar and an easy way to determine if one is bullish or bearish.
When it comes to Forex candlestick patterns, the inside bar is my second favorite pattern to trade. Notice how the inside bar in the chart above formed during a strong uptrend. An established trend is a requirement for trading this particular candlestick pattern. The reason for this is that the inside bar is nothing more than consolidation. So we have a strong trend followed by consolidation which leads to a breakout in the prevailing direction. Note that the pair had been in a downtrend for several months, therefore these are bearish continuation patterns.
You could make the case that the first signal in the chart above was also a pin bar, and I would agree. The combined rejection of former support and consolidation made for an incredibly profitable trade setup.
Last but not least is the engulfing candlestick. Unlike the inside bar that we just studied, this formation most often signals a reversal in the market. Because it takes more than an engulfing candle to warrant a position. To be considered tradable, an engulfing candle must develop at a key support or resistance level and after an extended move up or down.
While the video above only addresses the bearish engulfing candle, the same rules apply for its inverse, the bullish engulfing. For it to be profitable, an engulfing pattern must form at a swing high or low. Only then can it be used to formulate a trade idea. Hence the name, this is the most prominent and significant feature of this pattern. While the engulfing bar pattern is my third favorite in this lineup, it can be extremely telling if properly utilized.
The two bearish signals formed at resistance, creating two profitable opportunities. Know that the first candlestick in the chart above is also a bearish pin bar or at the very least a bearish rejection. Always remember that a bullish engulfing pattern at a swing low is a sign of potential strength. It signals that the current downward momentum is likely coming to an end. Alternatively, a bearish engulfing pattern at a swing high is a sign of potential weakness.
If you see one form in this manner, the chances are good that an increase in selling pressure is on its way. Last but certainly not least, both candlestick patterns must form at a key level to be tradable. Otherwise, you may find yourself trading a lot of false positives. Whether you trade using raw price action or some other means of identifying favorable setups, the three candlestick patterns above will surely improve your trading.
As lucrative as these formations can be, always remember that there are never any guarantees. Just like any other Forex trading strategy, the three above can and do fail, so always protect yourself.
Last but not least, the pin bar, inside bar and engulfing pattern are most useful when combined with other confluence factors. Then you definitely want to download the free Forex candlestick patterns PDF that I just put together. It contains all three formations above and shows you the exact characteristics I look for when developing a trade idea. Please log in again. The login page will open in a new window. After logging in you can close it and return to this page. The Misunderstood Engulfing Bar Reversal.
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