pipe_finder: Reversal Indicator for Pipe Top & Bottom Patterns

The pipe_finder indicator identifies high-probability Pipe Top and Pipe Bottom reversal patterns by analyzing candle body thickness, volume spikes, and trend direction. It helps traders pinpoint potential trend exhaustion points where two adjacent, unusually large candles of opposite polarity form a "pipe" shape.

Usage

The Usage section focuses on identifying price reversals through specific candlestick formations. Traders can use this tool to spot potential entries when the market is overextended.

• Pipe Bottom: Look for a green background highlight during a downtrend. This occurs when a large red candle is immediately followed by a large green candle, both supported by high volume.
• Pipe Top: Look for a red background highlight during an uptrend. This occurs when a large green candle is followed by a large red candle, indicating a potential bearish reversal.

The indicator is most effective when the sensitivity is tuned to the specific volatility of the asset being traded. Higher sensitivity values will result in more frequent detections by lowering the threshold for what constitutes a "large" candle body.

Details

The script identifies patterns based on four primary criteria:

1. Body Thickness: Both candles in the pattern must have a body size (absolute difference between open and close) greater than the moving average of recent candle bodies, adjusted by a sensitivity multiplier.
2. Color Polarity: For a bottom, the first candle must be bearish and the second bullish. For a top, the first must be bullish and the second bearish.
3. Trend Filtering: Patterns are filtered by an Exponential Moving Average (EMA). Bottoms are only valid if the EMA slope is negative (downtrend), and tops are only valid if the EMA slope is positive (uptrend).
4. Volume Confirmation: The average volume of the two candles forming the pipe must be greater than the Volume EMA, ensuring the move has significant market participation.

Settings

• Sensitivity: Determines the threshold for candle body size. A higher value makes the criteria stricter, while a lower value makes the indicator more sensitive to smaller "pipes."
• Candle Thickness Average Period: The lookback period used to calculate the average body size of historical candles.
• Filter EMA Length: The length of the EMA used to determine the underlying trend direction.
• Volume EMA Length: The lookback period for the volume moving average used to confirm the pattern.

FAQ

How do I interpret the background colors?

A green background indicates a Pipe Bottom (bullish reversal), while a red background indicates a Pipe Top (bearish reversal).

Can I use this on any timeframe?

Yes, the pipe_finder can be used on any timeframe, though it is traditionally used on higher timeframes (H1, H4, Daily) to filter out market noise.

How can I access pipe_finder?

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