A High-Probability Price Action Trade Setup

A High-Probability Price Action Trade Setup

I'm going to give you a high-probability price action setup: The Perfect Pin Bar. First, we're going to cover how to identify the perfect pin bar. Then, we'll cover how to use confluence to increase your probability of winning. And then we'll put it all together, so you can apply it in your trading right away. Let's get started. This is what a pin bar looks like.

It has a long tail. A small body. The rest of the bar in the opposite side of the tail is called the nose. Now, here's an important question: What makes a perfect pin bar? Let's simplify things. We have 3 simple rules: Rule #1: The pin bar must show a struggle between buying force and selling force, bulls and bears. And at the end of struggle, one side wins convincingly, illustrated by the clear rejection of price in favor of that winning side.

 Here's what it translates into how the perfect pin bar would look like on your chart: Because there's a struggle between buying and selling forces, the body of the bar would be small. Let's say no more than one third of the tail. And then because at the end, one side wins convincingly, let's say bulls win, it means that the tail of the pin bar would be long, and pointing down, showing clear rejection of lower prices. Let's see the bar I showed you before, now in context:

If you look at this pin bar, the market is trying to penetrate lower price levels. But it got rejected. The struggle between bulls and bears is resolved. Bulls win, illustrated by the long tail and the small body and nose. If you really pay attention, you also notice that this level, that the price failed to penetrate, is a strong support resistance level, having been tested several times in the past. Here's a rule of thumb: The more times a support resistance level is tested, the stronger it becomes. It also ties in with rule #2 and rule #3: Here's the second rule: The direction of the pin bar should be consistent with the general trend.

If we zoom out, we can clearly see that this pair is in an uptrend. So now, maybe you're wondering how do we know for sure if we're in an uptrend or downtrend? It's simple. Here we got higher high, higher high... and higher low, higher low. The market's trending up. So, in this case, we got a bullish pin bar in an uptrend. Criteria number 2 fulfilled. Let's move on to rule #3: We have touched on this point previously. 

The pin bar must happen at key support resistance level. Now let's bring in another concept to increase your probability of winning a trade. It's the Confluence concept. What this means is we want to put all the odds in our favor. So we look for a confluence area where there's many important price levels in close proximity with each other. Now, forget all the complicated technical analysis stuff. I want you to focus ONLY on the easy stuff, the HORIZONTALLEVELS.

Look at this chart:

First, we've got the horizontal support resistance. Second, we've got the Round Number 1.0300 level. Many many traders pay attention to those round number levels, so it's always important to take these round numbers into consideration. Third, we've got the 38% Fibonacci retracement level near this area as well.

So, in total, in this area we've got 3 factors: the horizontal support resistance, the round number, and the Fibonacci retracement. All of this makes this area an important confluence area where we can expect a lot of price action to happen. So when a pin bar happen around this area, it's a perfect opportunity. Everything is tipped in your favor. And then price moves aggressively upward. This trade works out perfectly.