The Pinocchio trading strategy is a reliable and accurate trading tactic. Widely used by expert traders, it’s simple concepts are also easy for the beginning FX options trader to understand and apply on their own charts.
The Pinocchio strategy, also commonly referred to as the Pin Bar method, virtually guarantees successful trades due to the fact that false breakouts or false signals are practically nonexistent. The reason this trading method has such a peculiar name is because similarly to how Pinocchio’s nose grew whenever he told a lie, whenever this strategy is formed on any chart or time frame we are also looking at a lie. Here’s why.
Pinocchio and Pinbars
As mentioned above, the Pinocchio bar is basically the Pinbar candle. The Pinbar is a single candlestick formation that has a very small body and a long wick. When a candlestick that will eventually close as a Pinbar is in progress, the candlestick will move towards one direction and then retrace to close near where it opened. This type of price movement is a tricky attempt to get inexperienced traders betting on the notion that price will soon move in the direction of that spike. The longer a candlestick’s wick is, the higher the probability is that price will move in the opposite direction.
A good example of the Pinocchio strategy is if an asset is currently in a downtrend and a Pinbar with a long lower wick pops up. We can safely assume that price is lying to us about the downtrend’s continuation, and that a retracement will occur over the next several candle periods.
Pinocchio’s Nose In FX Options Trading
When applying the Pinocchio strategy to FX options, we are essentially looking for three separate candles. They come in a bullish and bearish form, but the same principles apply. For both directions, the Pinbar will occur in the middle.
For instance, in the context of a downtrend you might see an average sized bullish candle followed by the Pinbar with a long lower wick, which is followed by a bullish candle which gives us confirmation that price’s downtrend is about to turn upwards. Conversely, within an uptrend a Pinbar with a long upper wick followed by a small bearish candle is confirmation that price will turn bearish.
So in short, we look to place Put options on Pinbars with long upper wicks and Calls on bars with long lower wicks. The exact point of entry will vary with each trader. Some traders prefer to wait until the final confirmation candle makes a 38% or 50% retracement into the middle Pinbar before opening a trade. Others enter a position as soon as the Pinbar closes.
It’s best to look to apply the Pinocchio strategy on larger time frames. The 1-hour time frame or higher is best, but it all depends on your risk appetite. For larger time frames, set your expiry time to end-of-day or end-of-week. Also, avoid setting short-term expiries on larger time frame signals, since price can easily retrace and not have enough time to move in your anticipated direction before the contract expires.