Pinocchio strategy is famously named after a Ghepetto’s wooden doll from story for children. When Pinocchio would tell a lie his nose would grow. Same happens on the markets, when certain asset has big difference between highest and lowest price in the observed trading period (usually in a day).
Pinocchio strategy is kind of trend trading that includes trading using charts. Charts consist of Pinocchio candles or Pinocchio bars, also referred to as pin bars. Other names used are candles and candle sticks. Before explaining this trading strategy into detail we need to define some terms:
High Price: The top of the Pinocchio’s nose (pin, candle) is the highest price the asset has reached during its open time.
Low Price: The bottom of the pin (candle) is the lowest price the asset has reached during the time it was open.
Open Price: The price the pin bar (candle) opened at. For a bullish pin this will be the bottom of the pin body, for a bearish pin the open price will be the top of the body.
Close Price: The closing price of the pin bar (candle). A bearish candle’s close will be the bottom of the body and bullish candle’s price will the top of the candle body.
Pin body (candle body) is the thick part of the pin that represents the distance between the open and close price. If the close is higher than the open then the pin closed bullish and will show a bullish pin body. If the candle closed lower than its open it’s a bearish pin and will show a bearish body. The thicker the body the more buying or selling pressure there was in that candle’s open period.
Pin range: The pin range is the distance between the pin high and the pin low. Large pin ranges indicate high volatility. Usually pins with large ranges are generated from large news, or economic events.
Upper candle wick: The upper candle wick is the line that produces from the top of the candle body and represents the distance between the candle high and body top.
Lower candle wick: The lower candle wick produces from the lower end of the body and represents the distance between the low price and the candle body bottom.
Bearish pin – the long wick is in the upper part of the candle.
Bullish pin – the long wick is in the lower part of the candle.
You can take a look at the picture below that illustrates terms stated above.
Pinocchio strategy is mostly used by experienced traders
Pinocchio strategy is all about looking at the charts and recognizing trends and more importantly recognizing when will trend change. When Pinocchio lies his nose becomes longer, same happens on the market, when we see wick becoming longer and longer we know market is lying to us and trend will change. The longer the wick, the higher the probability that price will go the opposite way and that the initial direction was a lie. So when you see long upper wick make sure you sell. Opposite when you see a long lower wick make sure you buy.
When it comes to Pinocchio trading strategy you must be careful, it is after all strategy better used by experienced traders rather than beginners. You don’t enter a trade after every pin bar, you must be skilled enough to recognize which pin heralds trend change. 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 it is wise to make a trade, but if the pin is countertrend, you will lose your investment.
Pinocchio is one of favorite and most used trading strategies and it usually yield great results. More experienced traders can get as high as 70% win rate. Make sure you gain some experience in trading before you start using Pinocchio and always remember it is better not to rely on a single strategy, make sure you are aware of other factors that drive the markets.