Three Bar Reversal

The Three Bar Reversal indicator is a price action tool designed to identify specific three-candle patterns that signify a potential shift in market momentum. By detecting structural exhaustion and subsequent price rejection, it helps traders pinpoint entry points for trend reversals.

Usage

The Usage section focuses on identifying high-probability reversal setups based on the three-candle sequence.

• Bullish Reversal (Long): This occurs when the first candle is a down candle, the second candle makes a new low (the lowest point of the three-bar pattern), and the third candle closes above the high of the second candle.
• Bearish Reversal (Short): This occurs when the first candle is an up candle, the second candle makes a new high (the highest point of the three-bar pattern), and the third candle closes below the low of the second candle.

The indicator automatically colors the price bars when these conditions are met, allowing traders to quickly spot potential pivots in the market.

Details

The Three Bar Reversal script implements a classic price action logic to determine trend exhaustion. Unlike simple engulfing patterns, this logic requires a "stop run" or a liquidity grab where the middle candle must exceed the extremes of both the preceding and following candles.

For a bullish setup, the logic requires:

1. Two consecutive bearish price movements (comparing open to close).
2. The middle candle must have a low that is lower than the candle before it and the candle after it.
3. The final candle must close above the high of that middle "swing low" candle.

For a bearish setup, the logic requires:

1. Two consecutive bullish price movements.
2. The middle candle must have a high that is higher than the candle before it and the candle after it.
3. The final candle must close below the low of that middle "swing high" candle.

Settings

As this is a pure price action logic script, it primarily relies on the chart data.

• Bar Coloring: The indicator changes the color of the bars based on the detected reversal direction (Green for Bullish, Red for Bearish).

FAQ

How can I use the Three Bar Reversal for entries?

Traders often use this pattern as a confirmation signal at key support or resistance levels. A bullish reversal appearing at a major support zone can provide a higher probability entry for a long position.

Does the script provide alerts?

Yes, the script includes built-in alert functionality for both bullish and bearish Three Bar Reversal detections, which can be configured to trigger on bar close.

How do I access this tool?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.