Reversal finder

The Reversal finder indicator identifies potential price reversals by highlighting candles that represent false breakouts of support or resistance levels. This tool helps traders spot high-volatility price rejections where the price briefly exceeds recent extremes before closing back within a specific range.

Usage

The tool can be used to identify trend exhaustion or fakeout scenarios at key price levels. A signal is generated when a candle makes a new high or low relative to the recent lookback period but fails to sustain that breakout, closing near the opposite end of its range.

For example, a bullish reversal signal is triggered if a candle drops below the lowest low of the prior bars but manages to close within the upper percentage of its total range (as defined by the Range threshold). This suggests that selling pressure was absorbed, potentially leading to a move higher. Conversely, a bearish signal appears when price breaks above a recent high but closes near the bottom of the candle, indicating a failed breakout and potential downward reversal.

Details

The script evaluates three primary conditions to confirm a reversal signal:

1. Extreme Detection: The candle must achieve a high or low that exceeds the highest high or lowest low of a user-defined lookback period.
2. Volatility Filter: The candle's total range (High - Low) must be significantly larger than the average range of recent bars, ensuring the signal occurs during a period of high activity.
3. Price Rejection: The close price must be located at the extreme opposite end of the breakout direction, calculated as a percentage of the total candle range.

Settings

• Lookback period for highs and lows: Determines the number of previous bars used to establish the support and resistance levels.
• SMA length for candles range: Sets the period for the Simple Moving Average used to calculate the average candle range.
• Range multiple: A multiplier applied to the average range; candles must exceed this value to be considered for a signal.
• Range threshold (% of candle range): Defines the required proximity of the close to the high/low. A smaller percentage requires a stronger rejection.
• Highlight signal bars?: When enabled, colors the candle bodies green for long signals, red for short signals, and grey for neutral bars.
• Highlight highest high/lowest low?: Enables visual tracking of the historical extremes used for the breakout logic.

FAQ

How do I use the Reversal finder?

You can use the signals to identify potential entry points for counter-trend trades or as a warning to exit existing positions when a breakout appears to be failing.

What do the different colors mean?

Green indicates a bullish reversal (false break low), red indicates a bearish reversal (false break high), and grey represents neutral price action when the bar highlighting setting is enabled.

How can I access this tool?

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