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Using the Pinocchio Trading Strategy

April 14, 2016

While there are many trading strategies binary options traders can use to trade the financial markets, there is only one trading strategy based on a fairytale character – Pinocchio. As the name implies it is actually based on the principle of the fairy tale character Pinocchio’s nose which grows when he lies. This strategy is often used by binary options traders and sees a high success rate.

Also known as the “Pin Bar” strategy, the Pinocchio trading strategy waits for a candlestick on a price chart to conform to a shape which is similar to Pinocchio’s infamous nose, which is a small body with a long wick. As the price starts to head towards one direction, the wick of the candlestick gets longer and longer until the price starts to retrace.

pinnochio-trading

On first impression, one can easily become fooled that the price will continue in the same direction. However, this is an illusion. As the wick gets longer, the probability of the price heading towards the opposite direction actually increases. So in essence, the long wick can be taken as denoting that the price is going to go in the opposite direction. Hence, what you should do when you see a Pinocchio type candlestick is to go short if the wick is pointing upwards and go long if the wick is pointing downwards.

Spotting the Pinocchio’s nose
If you are new to this trading strategy, what you should focus on first is learning how to spot the Pinocchio’s nose candlestick. Start by setting your chart to candlesticks view for the desired time frame and asset to be traded.

The next step is to look for three consecutive candlesticks on the chart with the center candlestick’s wick noticeably higher then the adjacent 2 candlesticks. The ideal condition is when the center candlestick’s wick is at least 50% higher the 2 candlesticks on either side. Once you see this Pinocchio formation on the chart remember that the longer the wick, the higher the probability that the price will move in the opposite direction.

To place your trade with the Pinocchio trading strategy, be sure to abide by the following rules:
Long Trade

  • The candlestick closes above the support level
  • The candlestick opens above the support level
  • The candlesticks trades below the support level for most of the range

Short Trade

  • The candlestick closes below the resistance level
  • The candlestick closes below the support level
  • The candlesticks trades above the resistance level for most of the range

The principle behind the Pinocchio trading strategy explains why it is so effective. When traders place their trading orders, they usually place it near or at the support and resistance levels. The Pinocchio’s nose candlestick with its short lived breaks at the support or resistance levels, gives the wrong impression as to the direction the price is actually heading. And when the price starts to retrace, it usually heads towards the opposite direction.

It is important to remember that the Pinocchio’s nose is a very unique price pattern as it is defined by the entire market structure rather than just a few candlesticks. Although we mentioned earlier that it is a three candlesticks formation with the center candlestick being the Pinocchio’s nose, we can only define it as such after viewing it at the support or resistance levels that it had breached. Only under the right context would the Pinocchio’s nose offer a reliable entry point. Even then, it is always prudent to look for confirmation through other technical indicators or chart patterns.

Once you understand how the Pinocchio trading strategy works, you will find that it is actually quite a reliable trading strategy. And if you are new to this trading strategy, the best way to familiarize yourself with it is by running it on a demo account.