How to Trade the Inside Bar Pin Bar Combination
Before we wrap things up, I want to show you one of the most profitable candlestick (combo) patterns around.
In case you don’t know, I’m a big fan of pin bars and inside bars.
But the real magic happens when these patterns form together.
I’ll explain why below, but first let’s take a look at both halves.
Two Halves Explained
As you might have guessed, the first part of the inside bar pin bar pattern is the inside bar.
An inside bar (or candlestick) is one that forms entirely within the previous bars range.
Here’s how that looks:
Notice how the previous candle (mother bar) engulfs the following candle (inside bar).
That’s really all there is to an inside bar, and it doesn’t need to be more complicated than that.
You already know what a pin bar is from the above sections, but here’s a quick refresher:
Remember that the nose should be relatively small and the tail should be about two thirds of the candlestick’s range.
Also note that the best pin bar patterns form with the
underlying trend.
The Best of Both Worlds
Inside bars are commonly traded as continuation patterns.
However, there’s a caveat.
If an inside bar occurs at key support or resistance, it can signal a reversal.
And what’s better than one reversal signal?
Two reversal signals, of course.
That brings us to the inside bar pin bar combination.
Notice how the inside bar formed first, and occurred at key support, and was immediately followed by a bullish pin bar.
It’s as simple as that.
The best part is that this combo pattern has an even higher win rate than either signal on its own, and that’s saying something!
Oh, and you can use the same entry and exit methods I explained above for this setup.
The 3 Ingredients of a Valid Inside Bar Pin Bar Setup
Like any of the strategies we trade here at Daily Price Action, there are certain characteristics that determine whether or not a setup is valid. The inside bar pin bar combination is no exception.
Below are three things that must be present in order for this pattern to be considered tradable. These are in addition to the actual inside bar and pin bar, which are of course mandatory.
- Time Frame
First and foremost, the pattern must form on the daily time frame.
This is because the inside bar, which makes up half the pattern, is only valid on this time frame.
Anything lower than the daily time frame is likely to result in a false break and should therefore not be traded.
- Key Level
The next and perhaps the most influential characteristic is the key level.
The entire premise of this pattern relies on a key level of support or resistance. It’s what gives validity to the pattern.
I strongly advise only taking setups where there is a key horizontal level or trend line acting as an inflection point in the market.
This will also help you to decide if a setup has become unfavorable.
- Pay Attention to the Closing Price
This next one is a bit different from how we trade a typical pin bar setup.
The difference here is that the close of the pin bar must be contained by the range of the inside bar.
The only exception here is if you get a “strong” close whereby the pin bar engulfs the inside bar in a way that is favorable for the setup.
The image below explains this in more detail
The image above shows two valid setups and one invalid setup.
Notice how the first image shows a pin bar where the open and close are contained within the range of the inside bar.
This represents a valid setup and is also the most common among the three.
The second image shows a pin bar that closed above the inside bar’s high.
This is still a valid pattern because of the strong close by the bulls. So strong in fact that it formed a bullish engulfing pattern as a result.
Last but not least is the invalid pattern.
Notice how the pin bar failed to close within the range of the inside bar.
This is considered a weak close as it signals that the bulls are not in full support of a move higher.
It’s generally best to ignore patterns like this.
Pro Tip: The easiest way to avoid unfavorable inside bar pin bar combinations is to only trade the obvious setups. If you have to study the market for an extended period of time to determine if a setup is favorable or not, it probably isn’t worth taking.
Entry Strategy and Stop Loss Placement
The entry and stop loss placement for the inside bar pin bar combination are very similar to that of the pin bar strategy. In fact, they are exactly the same.
Entry Methods
Option #1: Use the 50% entry strategy whereby you enter on a 50% retrace of the pin bar.
This is my preferred method as it provides me with a much more favorable risk to reward ratio.
Option #2: The second and less favorable option is to enter on a break of the nose of the pin bar. Entering this way gives you a less favorable risk to reward ratio.
Stop Loss Placement
As with the traditional pin bar strategy, the stop loss should be placed above or below the tail of the pin bar.
If the market reaches this area, the pattern is compromised and the setup is no longer valid.
See The Definitive Guide to Choosing a Stop Loss Strategy for more information on the topic.
The Inside Bar Pin Bar Strategy in Action
We’re going to finish off the lesson by looking at two inside bar pin bar combinations that occurred in the market.
Both of these setups were highlighted as they formed inside of the Daily Price Action private community.
The first setup formed on AUDNZD during a downtrend after the pair broke a key support level that had been in place for eight months
Notice how after breaking trend line support, AUDNZD formed a bearish inside bar.
The pair then retested former support as new resistance the following day and carved out a well-defined bearish pin bar in the process.
By using the 50% entry strategy we were able to secure an entry with a 45 pip stop loss.
The trade is currently 160 pips in profit and still going.
That represents a 3.5R trade, or 7% profit if risking just 2%.
Next up is an inside bar pin bar setup that formed on USDCAD within a ranging market.
This illustrates the power of this strategy in that it can be successfully traded in both trending and range-bound markets.
Prior to forming this range, USDCAD had been in a strong rally for more than eight months, creating a broader bullish sentiment.
The setup we traded formed after trend line support had held on four separate occasions.
By using the 50% entry strategy we were able to enter long with a 70 pip stop loss.
The profit target was easily identified at recent highs, which resulted in a 300 pip profit.
That represents a 4R trade, or 8% profit if risking 2%.
Not bad for three days of not working.
Summarizing the Inside Bar Pin Bar Strategy
The inside bar pin bar combo can be a great addition to your trading arsenal.
It’s very similar to the traditional pin bar strategy, only it comes with a second dimension that makes it even more reliable.
One thing to keep in mind as you begin trading this combination is that they don’t occur nearly as often as the traditional pin bar setup.
However, when they do occur at a key level with a favorable risk to reward ratio, they are certainly worth considering.
Below you will find some of the key points to keep in mind as you begin to trade this pattern on your own.
The pattern is created when a pin bar forms immediately following an inside bar on the daily time frame
The three ingredients for a valid pattern are the time frame, key level and the close of the pin bar
Any pattern that forms on a time frame lower than the daily should be avoided
A key horizontal level or trend line gives credence to the pattern and is therefore required
The pin bar must close within the inside bar’s range or show a “strong” close in the direction of the setup
Only trade the obvious setups where the tail of the pin bar is pronounced
The 50% entry is the most favorable way to enter the market
Frequently Asked Questions
What is a pin bar?
A pin bar is a type of candlestick pattern that suggests strong buying or selling pressure because of the long upper or lower wick, also called a shadow or tail.
What characteristics define a pin bar?
It must have a wick that is at least two-thirds of the candlestick’s range. So the body of the candlestick must be relatively small compared to the overall size of the pattern.
What makes pin bars effective?
The most effective pin bars occur at key support or resistance levels and occur either with the underlying trend or within an established range.
Are all pin bars reversal patterns?
Not necessarily. While most pin bars signal a reversal, they can also occur within a trend. So they can be continuation patterns under the right circumstances.
Is pin bar a good trading strategy?
It is, but only when combined with other factors, including the quality of the pin bar itself and whether it formed at a key level, among others.
Your Turn
Are you currently trading pin bars?
If not, will you in the future after reading this article?
Let me know right now in the comments below.