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How to Daytrade Using Pin Candles

The basic strategy is to find a pin candle -- this tips you off to a potential entry point. If you're not familiar with pin candles, check out our lesson on hammer and hanging man patterns.

Below is an example of a pin candle on a 15 minute GBPCHF chart.

The pin candle shows some weakness. In the chart above, it shows the price tried to rise, but bears pushed it right back down. So, the pins show who has control over the market at that timeframe: bears or bulls.

We can then wait for a 50% retracement on the candle. The pin candle showed us who has control in this situation -- it's the bears. So if the price retraces, it's an opportunity to short from a higher level. In this instance, we get the 50% retracement we're looking for, and can then enter.

So the order is filled. But let us not forget money management! On this chart, we see the 200 SMA -- a commonly used moving average -- just above our entry point. This is a solid resistance level for the timeframe (15 minute chart), and its proximity to the entry point makes it low risk trade.

So we're is in the trade with an initial stop-loss order based on technical analysis and sound money management, so we've identified the most we're going to lose on this trade. Fortunately, as the pin candle signaled, the trade moved in our favor as the bears gained control. In terms of when to exit, there are a few things we can look for, which we can see in the chart below.

Specifically, the exit cues are:

1. Price action that tells us where support will be. Note the large bullish candle -- we might get a similar candle on the way down, or some kind of opportunity to ride the length of that candle.

2. Commonly used moving averages -- these can often act as support.

3. Smaller timeframes. If we see momentum on a smaller timeframe shift, it's can be a cue to exit -- particularly if you have a profit target in mind. Remember that according to conventional trading wisdom your profit target should be equal to or greater than the amount you are risking.

4. If we zoom in to the one minute chart and saw a moving average crossover, suggesting that bulls were starting to gain some strength.

That was the cue to exit. The crossover on the minute chart occurred when we were up 29 pips -- about 1.6 times the amount we were risking by having our stop-loss order 18 pips away from where we entered. Favorable risk management and correct price action interpretation allowed this to be a winning day trade.