The Pinocchio strategy is a specific type of candlestick pattern, with candles that have oversized wicks paired with small bodies.
The strategy is named after Pinocchio as it is a reflection of the story. Whenever Pinocchio told a lie his nose grew. This strategy forces you to look at the market and understand when an asset is moving in one direction and has been for a while, but is actually ready to go in the opposite direction even though this is against the trend of the market.
That is what you are looking for with this strategy: a small body, and a long shadow (nose). Other names for this pattern are: the pin bar, shooting star, the hanging man, the hammer or the inverted hammer.
When the shadow (nose) is longer than the body that is an indication of a “lie” in the market. It signals that a trader should trade the opposite way to the direction of the shadow.
Conditions For The Pinnochio Strategy
- Time frame to analyze: 1 hour – 4 hours
- Expiry time to use: 5 minutes – 15 minutes
- the pin bar must be preceded with an uptrend.
How To Trade Pinnochio Strategy
As a binary options strategy, the Pinnochio bar can be used for entering the markets. You can either trade a lower or put option as soon as the pin bar closes.
Or you can wait for a 50% retracement of the pin bar and then trade the put option. You should extensively practise this strategy to see which entry method suits you.
Precautions With The Pinnochio Strategy
- Do not be tempted to use the 60 second expiry time for your options if using this strategy!
- Do not trade in a neutral (directionless) market if using this strategy. For a true Pinocchio signal, an uptrend must form. Trying to execute this strategy in a neutral market increases your risk a long way
See more binary options strategies here.