Continuation and Reversal Patterns

The Continuation and Reversal Patterns indicator is a technical analysis tool that automatically identifies Japanese candlestick formations categorized as trend continuation or trend reversal zones across any timeframe. It helps traders distinguish between high-momentum "leg" candles and low-momentum "base" candles to pinpoint potential supply and demand areas.

Usage

The tool highlights four primary patterns on the chart using boxes and labels:

• RBR (Rally-Base-Rally): A bullish continuation pattern where price rallies, consolidates, and then breaks out to the upside.
• DBD (Drop-Base-Drop): A bearish continuation pattern where price drops, consolidates, and then breaks out to the downside.
• DBR (Drop-Base-Rally): A bullish reversal pattern where a downward move is followed by consolidation and a strong upward reversal.
• RBD (Rally-Base-Drop): A bearish reversal pattern where an upward move is followed by consolidation and a strong downward reversal.

Traders can use these zones to identify potential entry points or areas of institutional interest. For example, a "base" in an RBR pattern often acts as a demand zone for future price retests. It is recommended to use this tool alongside price action and other technical indicators to confirm market direction.

Details

The script distinguishes candles based on the ratio of the body size to the total candle range (high-low).

• Momentum Candles: Candles where the body covers more than 50% of the total range are considered "leg-in" or "leg-out" candles.
• Base Candles: Candles where the body is less than 50% of the total range are considered "weak" or "non-directional" base candles.

The indicator looks for a specific sequence: a momentum candle, followed by 1 to 5 base candles, followed by a momentum candle that breaks the high or low of the consolidation range.

Settings

• Plot Reversal Patterns: Toggles the visibility of Drop-Base-Rally (DBR) and Rally-Base-Drop (RBD) formations.
• Plot Continuation Patterns: Toggles the visibility of Rally-Base-Rally (RBR) and Drop-Base-Drop (DBD) formations.
• Maximum Base Candles in zone?: Limits the number of base (weak) candles allowed between momentum candles. Setting this to a lower value ensures only tighter consolidations are marked. The maximum value is 5.

FAQ

How do I use the patterns identified by the indicator?

The patterns represent supply and demand zones. Continuation patterns (RBR/DBD) suggest the trend is likely to persist after a brief pause, while reversal patterns (DBR/RBD) suggest a change in market direction.

What do the candle colors represent?

The indicator recolors candles based on their strength: Green/Red for momentum candles and Blue (default) for non-directional/base candles.

How can I access Continuation and Reversal Patterns?

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