Reverse Pinbar/Hammer

Shape:

  • The reverse pinbar, also known as the inverted hammer, is a bullish reversal pattern that typically forms at the bottom of a downtrend.
  • It consists of a small body at the lower end of the trading range with a long upper shadow and little to no lower shadow.
  • The long upper shadow indicates that the bears were initially in control but the bulls managed to push the price back up towards the close, showing a potential reversal in sentiment.

Success Rate:

  • The success rate of the reverse pinbar pattern varies but is generally higher when confirmed by other technical indicators or patterns.
  • Studies and historical data suggest a success rate of around 60-70% when the pattern appears at significant support levels and is accompanied by increased volume.

Buy:

  • Enter a buy position when the price moves above the high of the reverse pinbar candle.
  • This confirmation of a bullish reversal helps ensure that the market sentiment is indeed changing.

Take Profit (TP):

  • A common method to set the take profit is to measure the length of the upper shadow and add it to the entry point.
  • For example, if the upper shadow is Tk.5 and the entry point is Tk.50, the target would be Tk.55.
  • Alternatively, use key resistance levels or Fibonacci retracement levels to set your take profit targets.

Stop Loss (SL):

  • Place the stop loss just below the low of the reverse pinbar candle.
  • This placement minimizes potential losses if the bullish reversal does not occur and the downtrend continues.

Sell:

  • Consider selling if the price fails to break above the high of the reverse pinbar candle.
  • Also, consider selling if the price reaches the take profit target or shows signs of weakness or reversal.

Profit Trailing:

  • Use a trailing stop to lock in profits as the price continues to move in your favor.
  • Adjust the stop loss level upwards as the price rises, keeping it a set distance (e.g., a percentage or taka amount) below the current price.

Lot Size:

  • Determine the lot size based on your risk tolerance and account size.
  • Ensure that the potential loss (difference between entry price and stop loss) does not exceed a predetermined percentage of your account balance (e.g., 1-2%).
Risk-to-reward ratio: 
  • Aim for a favorable risk-to-reward ratio (e.g., 1:2 or higher), where the potential reward is at least twice the potential risk.
Leverage: 
  • Use leverage cautiously. While leverage can amplify gains, it also increases potential losses. Ensure you have a clear understanding of how leverage works and its impact on your trades.

Other Conditions:

  • Confirm the pattern with increased volume, indicating strong buying interest.
  • Monitor overall market conditions and sentiment to ensure alignment with the bullish reversal outlook.

Caution:

  • False signals can occur, leading to potential losses. Always wait for confirmation before entering a trade.
  • Market volatility and external factors can influence the pattern's reliability.
  • Avoid trading reverse pinbars in a strong downtrend or when market sentiment is overwhelmingly bearish.

Pros and Cons of the Reverse Pinbar/Hammer Pattern

Pros:

  1. High Success Rate:

    • Historically, reverse pinbars have a good probability of indicating a bullish reversal, especially when confirmed by increased volume and other technical indicators.

  2. Clear Entry and Exit Points:

    • The pattern provides clear levels for entry (above the high of the pinbar) and exit (stop loss below the low of the pinbar), making it easier to plan trades.

  3. Bullish Reversal Signal:

    • Reverse pinbars typically form at the bottom of a downtrend and signal a potential reversal, aligning with a change in market sentiment.

  4. Easy to Identify:

    • The pattern's structure is relatively straightforward, making it easy for both novice and experienced traders to identify.

  5. Quantifiable Targets:

    • The length of the upper shadow can be used to set price targets, providing a systematic approach to profit-taking.

Cons:

  1. False Signals:

    • Reverse pinbars can sometimes lead to false signals, where the price moves above the pinbar high but then quickly reverses. This can result in losses if not managed properly.

  2. Volume Requirement:

    • Successful reversals often require a significant increase in volume. If the reversal occurs on low volume, it might be less reliable, leading to potential failure.

  3. Market Conditions Dependency:

    • The pattern's effectiveness can diminish in volatile or strongly bearish market conditions. It is most reliable in a stable or oversold market environment.

  4. Subjectivity:

    • The interpretation of the pattern can be somewhat subjective. Different traders might identify slightly different levels of resistance and support, leading to variations in pattern recognition.

  5. Time Frame Variability:

    • The pattern can form over various time frames, from minutes to months. The reliability and interpretation might differ based on the time frame, requiring traders to adapt their strategies accordingly.

Trading Psychology of Reverse Pinbar/Hammer

The psychology behind the reverse pinbar pattern plays a crucial role in understanding why it forms and how traders react to it. Here's a breakdown of the trading psychology involved in the reverse pinbar:

Formation:

  • Downtrend: The pattern typically forms during an existing downtrend. Traders are pessimistic, and selling pressure is strong.
  • Long Upper Shadow: The price initially moves lower, but buying pressure pushes it back up, forming a long upper shadow. This indicates that buyers are starting to enter the market, challenging the bears.

Market Sentiment:

  • Buyers' Confidence: As the price moves above the high of the reverse pinbar, buyers become more confident that the reversal will happen. The long upper shadow suggests accumulating bullish sentiment.
  • Sellers' Weakness: Sellers attempt to push the price down, but their efforts weaken as buyers step in, indicating diminishing selling pressure.

Reversal Psychology:

  • Anticipation: Traders who recognize the reverse pinbar anticipate a reversal. They prepare to enter buy positions upon confirmation of the reversal.
  • Volume Increase: A significant increase in trading volume during the reversal confirms that more traders are entering the market, reinforcing the bullish sentiment.
  • FOMO (Fear of Missing Out): As the reversal occurs, more traders rush to buy, fearing they might miss out on the price surge. This further drives the price up.

Post-Reversal:

  • Validation: Successful reversal validation (price moving above the pinbar high with increased volume) reassures traders that the pattern is legitimate. This leads to sustained buying interest.
  • Profit-Taking: Some traders might take profits near the target price derived from the upper shadow. However, the overall sentiment remains bullish unless significant resistance is encountered.
  • Trailing Stops: Experienced traders use trailing stops to lock in profits while allowing for further upside potential. This approach balances profit-taking with the possibility of continued price increase.

Failure and Money Management:

  • False Signals: Not all reversals succeed. False signals can occur, leading to trader frustration and potential losses. Proper money management, such as stop-loss orders, is essential.
  • Reevaluation: If the reversal fails, traders reassess their strategy. They might look for other patterns or signals to guide their next moves.

General Tips for Managing Trading Psychology:

  1. Patience: Wait for the reversal confirmation before entering a trade to avoid false signals.
  2. Discipline: Stick to your trading plan, including predefined entry, exit, and stop-loss levels.
  3. Emotional Control: Manage emotions like FOMO and fear by focusing on your strategy and money management principles.
  4. Continuous Learning: Stay informed about market conditions and continuously improve your technical analysis skills.

Understanding the psychology behind the reverse pinbar can help you make more informed trading decisions and better anticipate market movements.