As a price-action trader, candlestick formations (and even single candlesticks) are what I base most of my trading decisions on.
Yesterday I was sharing something with a trader around market context when looking for reversal or swing trades – we were discussing what makes the best reversals. In other words, we were looking at profit maximisers that might help us pick sweet spots in the market.
One of my favourite single candlestick formations is a long wick’ed pin-bar. Something like this:
This was a long trade I took on the USDCHF, and turned out to be an excellent ‘bottom’, returning a 3.8R trade.
Contrast that with another setup on USDJPY:
We have another pin-bar, on resistance, suggesting that price might fall. It obviously doesn’t.
I’ve purposefully extended both charts to demonstrate that the USDCHF pin-bar was a winner, while the USDJPY one was a big fat loser.
Looked at in isolation, both pin-bars are very similar. There is a small body and a long wick, suggesting a reversal took place and that price might change direction. However, the context of the two markets was very different.
There are two very important items that separate these charts:
1. Price was ranging in the USDCHF chart. I wasn’t buying into a strong downtrend, I was buying into a ranging market So even though I was picking a bottom, I wasn’t fighting a strong trend. In the USDJPY chart, our pin-bar would have been selling into a very bullish market.
2. The “close-by” context around the pin-bars tells you a lot. Look at the size of the candle leading up to the USDJPY pin-bar. The candle is huge, bullish and closing strong. Contrast that with the candles you see leading up to the pin-bar in the USDCHF chart. Those candles are smaller, they get smaller as they approach the resistance zone, they start to show wick…in other words, the market was slowing down as it approached resistance, not blasting right up to it!
Over to you
Here is my 4-hour USDZAR chart. Price has printed a beautiful pin-bar at 13.50. Given the context of this market, is price more likely to