Reversal Candle Pattern SetUp

The Reversal Candle Pattern SetUp indicator identifies outside reversal candle formations to highlight potential market pivot points where price has failed to sustain a breakout and reversed sharply.

Usage

The indicator provides visual labels on the chart to signal potential entries based on price action. A "BUY" signal is generated when a bullish outside reversal is detected. This occurs when the current candle’s low is lower than the previous candle's low, but the price reverses to close above the previous candle's high. A "SELL" signal is generated when a bearish outside reversal occurs, marked by the current candle making a higher high than the previous bar but closing below its low.

Traders can use these signals to identify "trapped" participants who entered on a breakout that failed to materialize. The script also includes background highlighting (green for bullish, red for bearish) to increase the visibility of these setups. These patterns are typically used as entry triggers in the direction of the reversal, especially when they occur at key technical levels like support, resistance, or pivot points.

Details

The script is based on market psychology concepts detailed by Frank Ochoa in "Secrets of a Pivot Boss." The power of the outside reversal lies in the failure of range extension; the market "tests the waters" beyond a previous high or low to see if initiative buyers or sellers will sustain the move. When no new business is found at those levels, responsive participants aggressively push the price back toward the previous value area, creating a springboard effect.

The implementation ensures that the price action meets specific criteria:

• Bullish Reversal: The current low must be lower than the previous low, the current close must be higher than the previous high, and the current open must be lower than the previous close.
• Bearish Reversal: The current high must be higher than the previous high, the current close must be lower than the previous low, and the current open must be higher than the previous open.

Settings

This script utilizes fixed price action logic based on the OHLC (Open, High, Low, Close) relationships of consecutive bars and does not currently feature external input parameters.

• ReversalLong: Internal logic that identifies bullish patterns where low < low[1], close > high[1], and open < close[1].
• ReversalShort: Internal logic that identifies bearish patterns where high > high[1], close < low[1], and open > open[1].
• Visuals: Hardcoded plot shapes (arrows) and background colors to signify the detected patterns.

FAQ

What is the psychological driver behind this pattern? The pattern represents a failed breakout. It captures the moment when the market attempts to trend beyond a previous bar's range but lacks the volume or initiative to stay there, resulting in a sharp reversal as traders exit losing positions.

Should I use this indicator on its own? While powerful, these signals are most effective when combined with other technical analysis tools, such as trendlines, moving averages, or oscillators, to confirm the broader market context.

How do I access the Reversal Candle Pattern SetUp? You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.