Doji Reversal Setup

The Doji Reversal Setup indicator is a technical tool designed to identify potential trend reversals by detecting specific Doji candlestick patterns relative to a simple moving average. It helps traders pinpoint moments of market indecision that may lead to corrective price action or trend shifts.

Usage

The indicator identifies two primary setups based on price exhaustion and mean reversion:

• Bullish Doji Reversal: Occurs when a Doji candle forms entirely below the 10-period SMA, indicating sellers may be losing momentum. A signal is triggered if price closes above the Doji's high within the next two bars.
• Bearish Doji Reversal: Occurs when a Doji candle forms entirely above the 10-period SMA, indicating buyers may be overextended. A signal is triggered if price closes below the Doji's low within the next two bars.

Traders often use these "DR" labels as early warnings for profit-taking or as entry signals for mean-reversion trades back toward the moving average.

Details

The pattern psychology centers on the Doji being the epitome of market indecision. After a sustained move where one side (buyers or sellers) has been in control, the appearance of a Doji suggests a stalemate.

The script implements a specific "Tolerance" filter to define the Doji. By default, the body (absolute difference between open and close) must be within 10% of the total candle range. To ensure the setup represents a significant reversal opportunity, the script checks if the Doji is "stretched" away from value—specifically, the high must be below the SMA for bullish setups, or the low must be above the SMA for bearish setups. The final confirmation is a breakout of the Doji's range within a two-bar window.

Settings

• SMA Period: Sets the lookback period for the Simple Moving Average used to determine if price is extended.
• Tolerance: Defines the maximum allowed ratio of the candle body to the candle range for it to be classified as a Doji (e.g., 0.1 represents 10%).

FAQ

How do I interpret the "DR" labels?

The labels appear when a Doji has been confirmed by a subsequent price breakout. Green labels indicate a bullish reversal setup, while red labels indicate a bearish reversal setup.

Can I change the sensitivity of what is considered a Doji?

Yes, you can adjust the "Tolerance" setting. A lower value requires the candle body to be even smaller relative to its range, while a higher value allows for slightly larger candle bodies.

How do I access Doji Reversal Setup?

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