Well, Geppetto, I bet you never thought a financial trading strategy will be named after your wooden doll, but here we are, talking about the “Pinocchio” strategy. Just like the lovely wooden doll had an addiction to lying, the “Pinocchio” candle is trying to lie to us every time…but with little success, because we are on to it and that’s what makes it profitable – we know it is going to lie to us.
What Is The Pinocchio Strategy And How To Use It For Binary Options
First off, let’s get familiar with this type of candle: a Pinocchio bar, also known as a Pin bar has a very small body and a long wick (or nose). Remember how Pinocchio’s nose became longer every time he told a lie? The same thing happens with the Pin bar: the wick becomes longer as price goes in one direction and then it retraces. The longer the wick, the higher the probability that price will go the opposite way and that the initial direction was a lie. This is how a bullish Pinocchio looks like:
That long lower wick means that sometimes during the “life span” of the candle, the bears (aka sellers, aka the Put guys) managed to take price to the lowest point of the wick. At that time it looked like they are in complete control. Soon after, the bulls (aka buyers, aka Call guys) came in the market and took price higher. The result of this behaviour is a long lower wick and a small body. The consequence of this behaviour is that often price will continue higher because this type of candle is a clear sign of rejection. The opposite of what I’ve just said applies for a bullish Pin bar (Pinocchio).
The strategy consists of buying a Put if the wick is up and buying a Call if the wick is down. But it gets a bit more complicated if you want better results: one way of using the strategy is how I’ve just described it and the other way is combining the Pinocchio with price action and technical indicators. Support and Resistance, trend lines, overbought and oversold levels, divergence, confluence and more will come together to give you the results you are looking for. It’s not as easy as simply looking for a Pin bar and trading in the direction it points to but the first step would be just to train your eyes to see this type of candle. Then you will take into consideration trend, ranges and all the other stuff. Okane’s video linked to this article will be of great help and will make you better understand it so I strongly recommend you watch it.
Why does the Pinocchio Strategy Suck?
Hmm…it can suck because you don’t just enter a trade after every Pin bar and some experience is required to gauge market environment. For example in a down trend, after a minor rally, if a bearish Pin (the wick is in the upper part of the candle) forms at a strong resistance level with an oscillator showing hidden bearish divergence I will take a trade faster than I can say Gepetto, but if the Pin is countertrend, I might get burned easily and although I’m not made of wood like Pinocchio, it will still hurt. So the Pinocchio strategy is not very newbie friendly even if it looks easy enough in the beginning.
Why the Pinocchio Strategy doesn’t Suck?
This one works in trending markets, assuming you only take trades in line with the trend and in ranging markets. It’s one of the most reliable strategies with an astonishing high accuracy if used correctly, because the forming of a Pin bar gives us a clear indication of how the market participants are behaving: in the first part of the candle, the bulls push price higher but the underlying weakness allows the bears to come back strong and close it near the opening price or even lower. This is of course an example for a bearish Pinocchio bar and the opposite applies for a bullish Pin. Well, my friends, did you ever got caught in a false breakout? I know I did. No more: the Pinocchio strategy also helps us identify a false break of a trend line, a support or resistance level or a false breakout from a range. Let’s assume we are watching the one hour candles and price is breaking a resistance level. Even if in the first half an hour or so, price is strongly advancing above resistance, wait for the candle to close because if the candle will become a Pinocchio by the end of the hour, it will more often than not come down some more in the next candles. By waiting to see if the bar becomes a Pinocchio, you just avoided the false break and now you have a clear indication what the market wants to do. Nice going, Pinocchio!
Wrapping It Up
Pinocchio is one of my favourite Forex trading strategies and from my experience with it I can tell you it has a 70% win rate with a 1:2 Risk:Reward ratio (sometimes I hold on to the trade for 1:3 R:R). However, it is better to see confluence of several factors when trading this one, not just the Pinocchio bar. In my book, this strategy definitely does not suck, but always be aware of the other factors that drive the markets, don’t just follow it blindly. And always be aware that I have used it mainly for Forex, not Binary Options. I am not saying it doesn’t work for binaries, just saying that you have to adapt it because you can’t use a stop loss and you cannot exit the trade early if it doesn’t go your way (well, with some platforms you can). Also there’s the expiry time problem and this is another situation where your trading “prowess” comes in play. Choose wisely, according to market conditions, of course.
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